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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
. k# V/ ?5 I$ l/ Y; \2 C* i  Tfrom 2002 to 2008, unsustainable price increases drove
  {) Q7 X# I  H+ runsustainable levels of building. Our view is that house3 d1 y% r9 D; |% m4 r$ f$ c
prices exceeded the value of housing that was justified by/ h- d* `) d0 @9 E  I1 ^
fundamentals by approximately 9% nationwide. This2 F, r/ Z/ m7 S' R' y
overpricing compelled a level of residential construction
( n# |7 x% z( l' O- P8 Nthat exceeded its fundamental-justified level by approximately
: K- Z; L( R. j12%, an excess that was exaggerated in the past! r! [) ?8 @. m5 Y5 }
three years.
4 U+ G: @; @. N  a5 RBy “overpricing” we mean that prices detached from- C) Q. C. W8 P$ m
their fundamentals, as witnessed by a steep erosion of2 I/ E/ z6 V3 v" U
affordability. The current unwinding of house prices reflects3 s- P, T1 V" m1 j7 m; ~1 e8 g( [
both a cyclical downturn and a return of house prices
6 ~( B" ?; H# I0 Ato fundamentally justified levels.
2 d2 u6 e. ^7 V6 {( }, e9 r8 FWe consider “overbuilding” of two forms: “demanddriven”
; {- u  [  [: O8 Iwhere homebuyers buy up too many houses and0 F+ U( f/ m3 r3 p; i4 ?2 a3 ~
that this demand cannot be sustained; and “supply-driven”
( |* g5 L+ w  R$ N/ r0 Kwhere builders accumulate excessive inventories. Although+ b8 W3 q: m4 i# F* B9 Y
there is evidence of both types, we contend that Canada’s( Q: @7 j0 [6 Y( j: t% a9 {5 {
“overbuilding” was mainly of the first type, where6 j1 U8 u. E, j9 n( Q9 c
homebuyers pushed homebuilding to an unsustainable pitch6 X! Y; b+ l" a$ X' d% `4 ?, f
that is now being rapidly reined in.
) [. K1 M4 D: CWhile most markets won’t face U.S.-style overhangs,
2 ~8 z9 Z+ c: A$ N  {the construction of too many new homes over the boom
/ O9 D. Y1 t. F& a6 Kmeans a deepened slump. This overbuilding will likely weigh1 {% e. c* _' P
on markets over the next few years. Even as Canada recovers/ z, m. Y8 o; w8 c$ L7 L+ e
from the cyclical downturn, house price growth will
: \4 Y) V$ g4 q2 M6 ~6 T/ fremain choppy and new residential construction will be
! ~2 V3 i6 ~+ m! X* M) edampened, owing to this structural weakness. Construction
& J' c' P# P, ~is now undershooting fundamentals and we expect this
& \3 E! C9 N  j6 Z' Hto persist over 2009 to 2011. We anticipate that nationwide
" F5 a, _1 @( `: T: Y" u8 u- Z$ i1 Zresidential construction will fall further to around
) F# k) l/ |( g) w3 A  f2 n' C125,000 starts over 2009 with a trough around 115,000 units
5 c" a  ^3 I8 L, B6 z! @+ ]8 _in the fourth quarter.3 _. F( @( j6 `! c1 q* w* [
To quantify the degree of overpricing and overbuilding,3 L# |  U! L* A9 t4 F
we first develop an empirical model, based on long-run
: u$ k& j; a2 Y: K) ^8 U4 ~fundamentals of house prices and housing starts in each/ C- e7 O5 \3 Q. k
province. Affordability is the key concept behind home% M5 I. g. }  }/ p
values since house prices should track incomes over the; r" `+ e/ ^% L& m6 s
long-run. Since homebuilders build to meet demand, we
! b" w/ W9 l' t: i7 n1 @6 Eregard housing prices and household formation as the drivers# _9 O' w/ s. Y  p
of residential construction." {! w( s. V1 Y' j! g3 E
To examine the degree of overbuilding, we employ a
  g- k; D1 a1 N% V+ o“counter-factual,” asking what level of residential construction2 `" G; V% H. G# T6 U8 E- K
would have occurred if housing had been priced
  }2 [3 u  X" {* |* r' [/ woptimally. We find that actual homebuilding exceeded this2 W# l" V  l6 L% P/ P6 s; b
fundamental-justified level by about 12%. Although new) F& S! s9 ], ]  L; e8 x
units were being absorbed, homebuyers simply bought too6 v+ @& o. y) m( t% g# V7 V
many houses at prices that exceeded fundamentals.# `$ F1 B7 w& \$ U
Regionally, we see the greatest strains on the Prairies,  p( [; {, ^) a6 |0 i
where housing demand will further contract under waning  Y9 b, C- m% S
population inflows. Saskatoon, Calgary and Edmonton are2 I3 Q, J2 Q, S" r% G
already witnessing surges in their unsold new homes at the
" [+ D  x" P: p, ?0 d$ g, Vvery time that the resale market has swung into strong7 S) b2 k* }4 _8 X* d1 @  c
buyers’ territory. Homebuilding in the Atlantic provinces9 u$ @9 z5 O; J4 `
has been relatively balanced but, while not plagued by structural% n' ]1 C; [" A3 H
weakness, will be singed by the downturn nonetheless.9 A3 G+ h5 X0 Q0 n% n' c, R" M* M
Québec shows signs of strain – especially given the: f8 a: }* ?. q* K5 J
strange accumulation of unabsorbed multiples on l’Île de
+ h- u% V1 K# ?2 _. v) ~Montréal – but recent building has been relatively balanced,2 k; w! v% Z/ k+ N0 d( |
given the province’s history of under-building and low ownership. ]" g/ l  g, R9 o4 P4 R+ D) N
rates. While Ontario homebuilding will reel from a8 C0 j2 U5 x# Q, A7 l
cyclical downturn, the degree of structural weakness appears
$ p3 J+ t! _  t+ p! ^limited – with the important exception of the Toronto
% e( Q( `1 f* J/ B. r- Vcondo market. Both in Toronto and Vancouver, historically
+ x2 T" N. N$ y% K, y8 _high levels of apartment-style units presently under
0 `; H9 G4 ~1 B9 t6 {! F) _construction mean that record numbers of condos will
2 G  a, Y" v7 G& N' Freach completion during 2009. If absorption rates fall, as
: a# m7 l1 P7 I9 c; k0 d" N( dcyclical factors would indicate, condo inventories could8 B' Y/ q4 ]6 O- R+ A
spike severely – particularly in Vancouver. However, while
6 f! x4 s9 w' fresidential construction in B.C. will definitely droop, we
: W, F3 p& v6 A* c9 ?2 ^+ K- Ranticipate that the West Coast will continue to benefit from
3 k% W% Y8 \: d3 ~  _/ o! ]* xinter-provincial and international migration over the coming
- o8 d) W- Z2 kyears, which, along with improvements in affordability,1 f0 m  g2 V. n) h3 |: N
will alleviate some of the pressure from overbuilding.; H7 ~0 g% a" U" D
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
, n* I7 x/ r3 g8 q5 T. SMARKET RETURNS TO FUNDAMENTALS
8 r! @% O  S: O* p7 R: O! ^( SGrant Bishop, Economist
% `, h8 B" I) o416-982-8063% T1 {5 ]7 x4 j+ y8 [
Pascal Gauthier, Economist
+ m/ n- V5 E2 {6 W4 q, Z416-944-5730! E9 S5 `% R: m/ @

  Z# E/ S, v0 B- o+ chttp://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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