TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
! L* n$ r% `; i1 {7 Mfundamentals by approximately 9% nationwide. This
6 H" A, Z0 F( }9 |3 J  Xoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
7 ^+ K# E  |2 f6 j2 |- }: yBy “overpricing” we mean that prices detached from
$ X/ @8 w1 ?* D7 `7 d9 ~! ^; `their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
) U- E+ x4 y% r0 g, qboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
3 n& k2 k7 y3 |that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
3 _7 S, i1 G. }+ v. D$ x9 w) sthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
3 q0 L* A( W, Ghomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
" x& G5 U; S% [/ B# kWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
6 ~  i( c, v: b0 ~; J9 _5 rmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
* p7 p! y  v8 P5 \0 i$ t( M9 Gfrom the cyclical downturn, house price growth will
; j4 C2 E8 n: E# k  d! Sremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
: G; {' }0 R( C5 ~( p' T2 V0 Q1 U0 P) p# cto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
' g$ a. Q) L% \- F( q125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
: t+ ~4 k, [" D! STo quantify the degree of overpricing and overbuilding,
( i2 P+ O( T6 C* m/ R& t9 N* Gwe first develop an empirical model, based on long-run
( H) q+ k. H; m% n- L, R: Q2 k# wfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
# L7 E# `) Q+ u) T- X5 t8 hvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
& S' d4 d7 E. X, ?4 G, S) M- Pregard housing prices and household formation as the drivers
' ]+ P" E8 V6 o5 vof residential construction.
To examine the degree of overbuilding, we employ a
) P$ e8 T& r  e( G“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
1 ^6 {( r. k& L. m  qRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
4 y7 r8 S9 E9 m2 u6 I6 T! S/ ?) fvery time that the resale market has swung into strong
7 ?; T* z& g2 p5 c+ xbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
4 v& |' `: p! zQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
! @; O* H; J4 B8 qrates. While Ontario homebuilding will reel from a
' g& `& M4 h! o( C8 V6 ycyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
3 X3 [8 D2 u* ^4 R' y/ e9 E! t! L) ucyclical factors would indicate, condo inventories could
4 n! W, x8 d( \. f' y# h2 s$ j$ sspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
# U3 K: j9 a7 V. I: r9 W8 p& Kanticipate that the West Coast will continue to benefit from
" o* y  k7 V* q& x+ }+ Binter-provincial and international migration over the coming
- B; i7 b+ L$ [, I  m) tyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
6 c, p, p: w% ]4 z. k! x  c416-982-8063
3 H2 D1 s& d  w1 |" H% }Pascal Gauthier, Economist
, i  h; d2 `, u; l+ P416-944-5730

) V: {& T# X$ N3 Nhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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