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
; C0 g4 I/ e9 ^2 k: H$ a* V5 F6 lprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
# J* K1 c, b; S; J6 A, m$ \overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
8 k) i4 Q, v) |2 q8 ^+ Ithree years.
By “overpricing” we mean that prices detached from
# }& a# ]! ~3 d6 e5 Utheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
2 }# m7 n' {! j; u8 @8 ^& iboth 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
2 ~! x2 T5 i% F+ F8 q- R/ a7 bthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
; x4 J& h8 r+ O, a' S: uhomebuyers pushed homebuilding to an unsustainable pitch
- R% W2 C$ f$ C2 ^  e1 b0 F% w9 kthat is now being rapidly reined in.
- N1 i1 q4 v; J3 [While most markets won’t face U.S.-style overhangs,
, Z- \# j1 K" p: ethe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
7 x* F) l6 A, h. p/ l( H" n) D% Cto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
2 a% a. q8 c" ]5 s$ lvalues since house prices should track incomes over the
8 R3 H* t' N- Q& O$ N7 K: G) jlong-run. Since homebuilders build to meet demand, we
1 @6 T. ~: t* `3 n. Oregard housing prices and household formation as the drivers
; E4 C; b/ w2 [6 {! ^2 N9 i* {of residential construction.
To examine the degree of overbuilding, we employ a
6 i* a$ p; I" `“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
) ?8 _( m: W3 X% s6 Voptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
' M% t1 j) f5 N3 c2 @  g3 Xunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
; E: @8 J* d( I0 |0 Kalready witnessing surges in their unsold new homes at the
4 b. p9 v: t. K. _0 W% F/ q2 k) Yvery time that the resale market has swung into strong
5 ]4 P  ~) E) k( Y- B2 b; Qbuyers’ territory. Homebuilding in the Atlantic provinces
: E% o' D4 j" O* L: qhas 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
strange accumulation of unabsorbed multiples on l’Île de
7 M; Q: l& _; M2 R& g. L) z, b/ m- b) cMontréal – but recent building has been relatively balanced,
5 Z" G# R' @- S+ m" G# ~5 S( wgiven the province’s history of under-building and low ownership
9 G; j+ s% G+ j; J8 k4 Mrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
0 |4 I! S% G7 Fhigh levels of apartment-style units presently under
0 t" z2 [0 _. Qconstruction mean that record numbers of condos will
. `5 `' l5 |0 P. \9 dreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
% x& q, q' Y* K- Bspike severely – particularly in Vancouver. However, while
8 f4 ^# @% Q$ w& q" Q/ D' }residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
  ^6 c: {+ ~( b6 n! Finter-provincial and international migration over the coming
( M( [* [4 i7 l9 a* _years, which, along with improvements in affordability,
7 N7 w1 m) v3 O: V, D% f+ Vwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
# V# r8 N( {/ v, c; BGrant Bishop, Economist
0 X) n0 r- h! o( x5 z1 R0 K+ F  s# D& K416-982-8063
& f( |2 ~1 Z- |; \Pascal Gauthier, Economist
, \2 x, X) A# m1 Z% D  }416-944-5730

* n- p! \* M3 u9 y8 l/ @2 @/ Thttp://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙