TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
: z7 f4 Q- E+ x! nfrom 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
% N# {' U" u, t" Qfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
3 e. o: w- }9 j* o6 Xthree years.
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
both a cyclical downturn and a return of house prices
  Y& X" G6 ]. t9 Z3 eto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
# S' n+ o' y3 l4 mwhere homebuyers buy up too many houses and
$ F7 v" F& h3 K. ]9 M7 N1 K* Kthat this demand cannot be sustained; and “supply-driven”
, L. ~, ]! V, U% vwhere builders accumulate excessive inventories. Although
- q/ c& a: A2 I) D8 i1 {5 mthere is evidence of both types, we contend that Canada’s
1 j+ O* v" |# a“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
  d' Y' ~0 M5 b9 N, S: imeans a deepened slump. This overbuilding will likely weigh
0 S6 U3 e' Z! X4 V( M% aon 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
5 d9 q. v. P: Bdampened, owing to this structural weakness. Construction
9 V  E! B( T( G* L4 D! [6 |' y+ ~is now undershooting fundamentals and we expect this
+ j4 w- H6 L$ l. q+ O# D: n  U, A+ fto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
1 m8 a0 t9 N- Y) n' T125,000 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
+ @8 ^* ^" G1 e" J) C9 d! i+ F3 xfundamentals of house prices and housing starts in each
% ^/ U! b; o8 D7 }* Lprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
! ~6 Q6 S/ }9 w$ v, a" ~( n: ylong-run. Since homebuilders build to meet demand, we
' f2 v2 d- @- t& S  aregard housing prices and household formation as the drivers
of residential construction.
* G8 n# @4 w+ FTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
! T- c6 r, [5 F' @8 i- Qwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
/ X! g* l) i  Dfundamental-justified level by about 12%. Although new
0 t# j9 J2 n0 i6 j9 t/ Zunits were being absorbed, homebuyers simply bought too
' P! l0 Q: f" G: a+ \3 [many houses at prices that exceeded fundamentals.
& z" j# d; x7 L( G/ T& l2 ?: ERegionally, we see the greatest strains on the Prairies,
6 \, S' h. H6 O: J4 x& r* R7 Cwhere housing demand will further contract under waning
2 }% S& N( N- s6 Spopulation 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
buyers’ territory. Homebuilding in the Atlantic provinces
3 g# B" I5 s% G) Phas been relatively balanced but, while not plagued by structural
6 g$ |% O" T) m, g) b7 pweakness, will be singed by the downturn nonetheless.
. y: g8 M/ s. z) I3 ]1 A! O5 ^, GQuébec shows signs of strain – especially given the
+ t+ P3 G: n  a8 ]( V$ C3 Rstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
* v. i  E3 b) ugiven the province’s history of under-building and low ownership
6 U' B$ X% a0 e: q: N" Crates. While Ontario homebuilding will reel from a
  S: X6 T* i1 p2 g6 h2 hcyclical downturn, the degree of structural weakness appears
* b2 M4 H6 Y9 O. plimited – with the important exception of the Toronto
( j$ I4 Z! @  Z) k! D; H3 r' x, pcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
  v7 F$ f# y  p5 ?9 Dconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
1 s1 r4 j+ u9 {: m8 }2 J/ `spike severely – particularly in Vancouver. However, while
8 B- u3 V5 R  Lresidential construction in B.C. will definitely droop, we
* q* K6 ^( z0 g9 [anticipate that the West Coast will continue to benefit from
0 `7 U9 N/ O! k8 o. Kinter-provincial and international migration over the coming
" V: v' S, m3 @) o9 H% Yyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
7 ^0 M9 m6 W1 ^OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
3 v4 ]0 Z4 d; F, t' NGrant Bishop, Economist
+ _5 @$ w2 b+ N, C416-982-8063
Pascal Gauthier, Economist
416-944-5730

8 t- s8 c9 T$ h3 U5 X6 Jhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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