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
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
9 C4 T) n7 x9 G0 Y7 I/ X( Bthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
: j/ i' n2 {2 E/ |8 _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
% \7 q1 I( m% J1 a& rboth a cyclical downturn and a return of house prices
% i& I, I( U, R& q% X4 U2 ito fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
5 H+ T6 x& i9 e1 B; J6 Kwhere homebuyers buy up too many houses and
: i2 X4 b4 T4 i! H2 a+ nthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
% h9 _# [7 b; Z% \4 Z7 ?: Tthere is evidence of both types, we contend that Canada’s
5 @9 o. a  v' C( Z“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
: \/ w  k1 P* L9 e9 Gthat is now being rapidly reined in.
% ~0 v& W& v  K, NWhile most markets won’t face U.S.-style overhangs,
+ W  x! Z8 j" h6 g+ e  Fthe construction of too many new homes over the boom
8 x# e6 e+ f' r; r; }8 i# v/ R2 Bmeans 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
) J+ ^& l5 T& x8 Tremain choppy and new residential construction will be
; F; W( Z, C) I6 g2 B, B$ a; Tdampened, owing to this structural weakness. Construction
5 m9 {- P* j* u* t7 X) S: r3 eis now undershooting fundamentals and we expect this
0 d" W9 g9 ?0 D4 I9 T$ bto persist over 2009 to 2011. We anticipate that nationwide
' O: B' U6 y! Q3 w2 X/ ~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,
' I# ^1 {3 U3 Y1 ?' C1 K% ]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
3 H4 j8 A! [: wvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
' K- z& M1 y; W, h5 {7 b+ X% U( Pregard housing prices and household formation as the drivers
5 V7 l: V+ J( W5 c# I5 Lof residential construction.
. ^6 @0 \/ I6 w5 cTo examine the degree of overbuilding, we employ a
: L; s8 I5 h, U0 W% C* ]“counter-factual,” asking what level of residential construction
/ v* B; s  T' }& P7 e# Jwould have occurred if housing had been priced
6 w5 Q; K: q. m3 {optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
+ j6 g7 P3 n$ b' O, mmany houses at prices that exceeded fundamentals.
- r2 |% {, T: v0 ARegionally, we see the greatest strains on the Prairies,
: n. y, q+ p5 s0 Kwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
# n1 {) _3 ^# Q* a; m3 O5 ]buyers’ territory. Homebuilding in the Atlantic provinces
+ p' Y4 _. s7 }% D% V! }has been relatively balanced but, while not plagued by structural
4 z; t! |. V5 f1 r1 ?( `weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
2 C# K8 c7 Z$ D* Q4 ustrange 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
$ k7 i- F! B$ @0 F, ?& i. N* m5 crates. 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
. g! q9 |% R3 Y" H/ {1 K( chigh levels of apartment-style units presently under
1 W8 |& \8 m7 U+ U* gconstruction mean that record numbers of condos will
' {" q2 I. U! ]; greach completion during 2009. If absorption rates fall, as
! e  T/ A9 s; R( s5 I) m. d& `& qcyclical factors would indicate, condo inventories could
4 ^9 v  [! l: B" c7 x! yspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
, N: T% ]2 A) X: Q: Uanticipate that the West Coast will continue to benefit from
, r; P+ A$ F9 |# [1 hinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
' H2 \! }2 r. ]  ^; DOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
: f. Q" C" v/ |8 n  `416-982-8063
: z$ a$ n3 C( [/ D# FPascal Gauthier, Economist
416-944-5730
7 W9 J: P: u! Y! n" w" n- T
+ l) P- L4 }  C9 ?2 N# f  Hhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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