TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
0 |: n3 e- l- W5 V) ?5 Z3 Xfrom 2002 to 2008, unsustainable price increases drove
  c. ?& F) O' j9 L$ o" t4 A+ Qunsustainable levels of building. Our view is that house
$ D( N0 O# y1 k; ?- @8 p2 U9 gprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
8 R7 A. {, @4 U6 R( |) I% Q8 tthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
+ E9 v) Q% O. Dthree years.
, L! T$ k4 O. P3 K( zBy “overpricing” we mean that prices detached from
8 k" V  N) O7 D+ C- Z( w  Utheir 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
. L0 |9 a0 n# X8 m+ l) ?to fundamentally justified levels.
) P2 [0 l( Y. E  HWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
& w+ e1 u* l6 vthat this demand cannot be sustained; and “supply-driven”
3 |3 r' ^* Y  [# E3 [where builders accumulate excessive inventories. Although
. x! i8 q& z/ ^! d+ X: z# k1 bthere is evidence of both types, we contend that Canada’s
2 N7 Q7 D- ?. r' m5 h4 e“overbuilding” was mainly of the first type, where
homebuyers 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
% m$ F( H, C3 A/ Z9 `8 Qmeans 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
) D. u: }9 G5 S' Tdampened, owing to this structural weakness. Construction
: t  N- K/ ?1 P7 L3 ~is now undershooting fundamentals and we expect this
% M( w# N3 \; Z+ B% S$ q7 lto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& P% v" n4 W1 x9 O125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
; @) P3 H6 T9 A7 H, aTo 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
0 l) O  E- Z1 ?$ Fvalues since house prices should track incomes over the
0 z( n: }3 K5 c* |/ N( C3 @( Klong-run. Since homebuilders build to meet demand, we
$ ~& v0 k+ M* t# F+ V$ h; ~regard housing prices and household formation as the drivers
* m6 R. \1 q% |! Y+ p' ?% oof residential construction.
To examine the degree of overbuilding, we employ a
& s. x' l3 p! g! S0 X4 [“counter-factual,” asking what level of residential construction
2 e2 U0 d/ c1 m( M% Fwould have occurred if housing had been priced
: X" G' L7 `* s; }5 {1 ^5 Eoptimally. We find that actual homebuilding exceeded this
/ X6 t8 B" e" [7 W, Xfundamental-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,
& x) ^, f" {  C2 @, D$ Ywhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
' D0 f# i- L: kvery 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.
) w0 V# H0 D$ OQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
* o. j- N) Z4 z  F& ogiven 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
$ k& B) C; z, b' i; Nlimited – with the important exception of the Toronto
6 c! n* ^1 [% @9 t7 w/ v' D+ }% `condo market. Both in Toronto and Vancouver, historically
- d. X! ?5 J+ ~2 j5 whigh levels of apartment-style units presently under
% F. o" N# x6 u# C7 R) X* gconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
$ {* c; _. ?0 q; b. Z5 B4 ~- dcyclical factors would indicate, condo inventories could
! J$ ]! n) h* Z5 Tspike severely – particularly in Vancouver. However, while
/ \' ~, x" Y  y9 V3 ~residential construction in B.C. will definitely droop, we
) M! b( a$ Y4 ~" K$ a1 Ranticipate that the West Coast will continue to benefit from
/ K; L5 X# d) V0 s2 {, \3 ^inter-provincial and international migration over the coming
" L6 _$ p- r+ V; m  c9 Iyears, which, along with improvements in affordability,
$ o) o+ W& ~! I/ V) bwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
0 d+ R1 T; ~' ]& g" i5 `5 ?Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
  y( j5 n( [. G5 U416-944-5730

( o9 K2 a7 J3 P: B2 Phttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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