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
% y" }% {& x6 i/ i: a8 |fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
  [- f1 W! l3 N) ?% Ythat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
. N- x: d6 E4 j% Z; e' w: Mthree years.
By “overpricing” we mean that prices detached from
2 O2 j. ?- ]7 B1 Q6 Jtheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
$ O. a- y  }" e, }+ a$ _to fundamentally justified levels.
, b. u7 k) d9 E! lWe consider “overbuilding” of two forms: “demanddriven”
" i, a5 W  R) d0 L2 C0 @where homebuyers buy up too many houses and
  M0 q# \' P4 h. P7 T/ Qthat this demand cannot be sustained; and “supply-driven”
, r6 B2 t4 Y% D% v  U* xwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
% N9 V" L( p7 b/ p6 Thomebuyers pushed homebuilding to an unsustainable pitch
: V4 c4 [7 o# P# U+ E; Rthat 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
' C' a2 X" ~3 x& L$ r* h+ ]1 ?means a deepened slump. This overbuilding will likely weigh
; ?3 A0 Q' \6 Z9 [' I0 N2 ion markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
. G  \* t4 V5 n1 l: J! nremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
$ s) ]. R/ E3 t% I6 [- a! [' e9 d" Aresidential construction will fall further to around
/ T7 I8 Q" b' O- _5 k/ h, d" Q1 H6 z125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
- F5 a- r/ F( ~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
7 d) r* y6 f0 z$ i- i5 H: f0 }values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
0 B/ ?1 _+ h; _) J& Gregard housing prices and household formation as the drivers
, X8 Z# w' z6 b, Mof residential construction.
To examine the degree of overbuilding, we employ a
* T) W" r3 h6 i7 [“counter-factual,” asking what level of residential construction
7 o. @) i+ C: |, b, K2 ]would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
( S, K$ `3 w! N, _- Y: V3 x% jfundamental-justified level by about 12%. Although new
. B( V7 B- ?: @: X8 Gunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
8 U- t  N' ?4 B  z1 D8 d" A( rRegionally, we see the greatest strains on the Prairies,
. D8 x$ K1 P+ a& Xwhere housing demand will further contract under waning
7 \3 N- j' V# a6 vpopulation inflows. Saskatoon, Calgary and Edmonton are
( X$ D, @" U- h% Jalready witnessing surges in their unsold new homes at the
9 j0 M3 H7 D9 a8 Q) A% ~: @9 H. q2 Wvery time that the resale market has swung into strong
0 T' c0 T" |; c" l) ]2 n0 `! g. Obuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
1 w/ b5 R" ~8 A! Z2 AQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
: ^( b# u$ v' Z$ `  Agiven 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
condo market. Both in Toronto and Vancouver, historically
; a# f3 S0 ~+ Z: R5 O1 F0 R" Chigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
( H! b! W! r" ]cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
' c: Q( }2 z$ Q) p0 q! F& Qresidential 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
0 x- n$ A6 r1 _4 ^) ^4 I9 @7 l" Hyears, which, along with improvements in affordability,
/ ^  x6 S2 g* v) Owill alleviate some of the pressure from overbuilding.
# z( w# O, i& ]; {7 t0 s, SOVERPRICED AND OVERBUILT: CANADIAN HOUSING
- F5 b2 r; ?4 y2 JMARKET RETURNS TO FUNDAMENTALS
5 ^  b9 P- q9 HGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
( q! G- l2 L% S) ~, F. |/ Y- N
6 [& O! e; K' c) Z, dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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