TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
/ s/ f8 E& s& N; M/ z; |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
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
/ V) n* A' Z/ m+ vthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
5 X5 g3 n% l# L+ ?# g/ l- D( Sboth a cyclical downturn and a return of house prices
4 ]7 C& J, G. ^& o1 ito fundamentally justified levels.
' U& Z) ]' _. o0 v( h: z9 Z: XWe consider “overbuilding” of two forms: “demanddriven”
" e# @" s4 f8 R, `; m, u( y1 \where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
1 B2 n2 N8 K7 Q' g# f) ~" F" fwhere builders accumulate excessive inventories. Although
4 J) I0 ~' Y( }2 O2 U6 s: f; ~) h: }there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
4 n. A0 Y' o1 T( w; N" shomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
8 L5 F  t* a: i6 vmeans a deepened slump. This overbuilding will likely weigh
- d% k1 I+ J" `/ W/ V) don markets over the next few years. Even as Canada recovers
: \# ]3 X* x, z, C5 Wfrom the cyclical downturn, house price growth will
! Q; }7 g% T& Y: z8 y; U: ^remain choppy and new residential construction will be
7 {" G8 O. `0 j. D! Odampened, owing to this structural weakness. Construction
) H5 Q9 U8 H9 o: u0 S; H6 }is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
4 J( X% p, N" w: qresidential construction will fall further to around
  [4 H' o5 h% C2 Q+ ^125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
9 S. V( c; E3 S" Y1 f6 Gwe first develop an empirical model, based on long-run
% e) T" a' j) r- S$ ^- Ifundamentals of house prices and housing starts in each
9 A: P" P# b, Gprovince. Affordability is the key concept behind home
1 d4 I" p- M$ N3 b2 Vvalues since house prices should track incomes over the
- {; d0 q. \7 w1 ~1 I% B' \long-run. Since homebuilders build to meet demand, we
# x3 |( H* Q2 Y2 {, C" A* Z$ Hregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
" r1 H! V0 V% c$ \& }5 |“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
/ ~5 x7 F- t  \0 q% R& _units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
, D9 t2 d6 p+ L" {1 K1 Owhere housing demand will further contract under waning
: U8 v' {3 J' s- Cpopulation inflows. Saskatoon, Calgary and Edmonton are
4 U* ?' I0 r; q: a1 [0 ]/ ?- c, ~7 ~already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
7 N9 H+ D; z5 L( ?! Astrange 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
rates. While Ontario homebuilding will reel from a
3 ?6 K: K) X, S% u) ~  `5 A) r0 zcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
6 ?/ F5 X" x1 V! D) lcondo market. Both in Toronto and Vancouver, historically
, B$ [: Q) S$ W. c. yhigh levels of apartment-style units presently under
/ k9 ?- m: V' q2 u/ Sconstruction mean that record numbers of condos will
' g: _. N& w+ D/ b/ d' I% C6 ~% jreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
. \2 u; M, v. R: \/ Uspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
2 @: s: z% V7 danticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
8 |+ H. q  K5 ywill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
- @2 V& @; ~; q4 A416-982-8063
Pascal Gauthier, Economist
0 C2 N( k7 ], Y2 G416-944-5730
/ j* U: y4 k$ w6 R
http://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙