TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
# y4 W0 ]! S. F9 Z! Y- xfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
! G' S/ h! x% w1 [prices exceeded the value of housing that was justified by
9 l/ {# Q6 E+ d" W0 [7 jfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
1 J  X1 h. e0 T" T12%, an excess that was exaggerated in the past
" a$ |1 m7 \7 q1 L/ Bthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
5 w5 F! j$ G# `: x) h  \affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
& v2 e, E& |) @We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
. o# \* i5 ?: y( r* \0 ]where builders accumulate excessive inventories. Although
, J0 \$ c2 p& O9 }there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
  G/ L% ~6 t5 W5 I2 mthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
4 a  @: p6 y, X4 x$ t5 ~/ i6 `the construction of too many new homes over the boom
7 k3 s1 f4 V) s! B* fmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
! I1 t  K: F& A  z% p: Dfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
$ F2 J# U$ `* z3 Z9 z, E0 D& n& Udampened, owing to this structural weakness. Construction
. p# Q& |" O' X4 fis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
+ L) F! x6 u6 g/ I. j( sresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
, o0 W( s% n8 S! i* c) eTo quantify the degree of overpricing and overbuilding,
* }' f; m1 V3 \) B8 Wwe 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
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
; T+ e5 V5 @9 v+ ^regard housing prices and household formation as the drivers
- h% P) K9 V- P2 X/ F: k- {  s3 L# [of residential construction.
- m8 h: e2 v1 J" a) J. v; M8 w9 wTo examine the degree of overbuilding, we employ a
+ O3 V$ F0 o/ D3 F4 y& L' g“counter-factual,” asking what level of residential construction
! P, \) q# p% i  w( k* ~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.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
( ^7 U' K3 U' Q4 F5 e" Ipopulation inflows. Saskatoon, Calgary and Edmonton are
% Q( b! D$ ?& P' k4 X/ L9 ~$ Calready witnessing surges in their unsold new homes at the
; A- X! y/ P/ svery time that the resale market has swung into strong
/ p. b1 h$ x7 `/ R* Ubuyers’ territory. Homebuilding in the Atlantic provinces
8 U" u+ ~" l9 O- X, m) }has been relatively balanced but, while not plagued by structural
' o8 B/ G  ]1 T& G2 ^6 p# B3 k" aweakness, will be singed by the downturn nonetheless.
Québec 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
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
! T. f) J* H+ i/ b" ycondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
. ?: c& n0 u' u" Jreach completion during 2009. If absorption rates fall, as
, P/ g) X1 E2 V7 f: a0 G2 Ycyclical factors would indicate, condo inventories could
& `5 N+ G' F$ ~" R6 Dspike severely – particularly in Vancouver. However, while
& J7 g/ J" o& W* ?3 d: H0 p' aresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
% Y" a  W0 Q$ I4 [7 Z, M! }% @years, which, along with improvements in affordability,
) |1 M2 O/ o/ N1 A5 I* u4 fwill alleviate some of the pressure from overbuilding.
: j# T6 M% k. x$ LOVERPRICED AND OVERBUILT: CANADIAN HOUSING
0 b; p" K6 K2 ^: l% S/ L9 {* z0 DMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
. @/ J) p, P" e5 F: RPascal Gauthier, Economist
7 e) m# t; k% s8 U416-944-5730
! H) X; f2 E. @8 V9 p
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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