TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  H5 Y" f3 E  N; p4 h# J$ Zfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
8 \$ t  r+ G9 o0 |6 D0 N, Gprices exceeded the value of housing that was justified by
) Z7 @% B2 l; V: k' Mfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
2 e8 B/ {# c+ p  I12%, an excess that was exaggerated in the past
. Q+ I  x+ a# H, `# r$ Jthree years.
4 [2 F0 K$ d; Z/ KBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
& m% b0 f" a( ^4 Waffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
# g; s/ B) U$ v( {1 J! D7 ~* fto fundamentally justified levels.
3 z8 C* M9 L0 U  {& u" b+ X& s5 nWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
0 u/ q  U% H% o- M4 ywhere builders accumulate excessive inventories. Although
) w& o7 S- Y  l/ f/ `there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
+ `: ^! v+ f' r/ m* kthat is now being rapidly reined in.
5 V7 n, B9 S, F. D6 v# eWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
$ E6 z' b9 ~( J2 y: e3 Ameans 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
3 {- M2 \. M' K" \remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
% ~2 F% I3 ^/ `4 Xto persist over 2009 to 2011. We anticipate that nationwide
6 Q% k" M) e  w' p" nresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
4 ~' \: T7 e& K! F+ B& Xin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
: B6 c# g. u5 o, rfundamentals of house prices and housing starts in each
/ G6 Z( `8 v6 I; X3 {! Lprovince. Affordability is the key concept behind home
3 z9 C0 t$ `6 A5 l$ k- {" Yvalues since house prices should track incomes over the
/ ]: y8 q6 y+ K" S1 V% p' @long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
. C  S& s& b7 T3 G“counter-factual,” asking what level of residential construction
" I1 [8 J/ f: Vwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
3 e5 \$ \  N! c0 q4 iRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
1 t" u9 ^( @, Z, j" A' Nalready witnessing surges in their unsold new homes at the
! n! [% x8 u  @. q  bvery time that the resale market has swung into strong
2 e/ k) S7 _6 Z, s  x# _' Z- obuyers’ territory. Homebuilding in the Atlantic provinces
' }. ]' |  \( S1 e) W: S% r- Bhas been relatively balanced but, while not plagued by structural
, \# d+ f3 O: O' d+ \* D" R. wweakness, will be singed by the downturn nonetheless.
- F+ N9 U+ h5 K8 m4 a* N! uQuébec shows signs of strain – especially given the
strange 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
# y6 n7 z! w" K0 L& y8 w% ^9 Jrates. While Ontario homebuilding will reel from a
7 Q- k6 X- i% r# N$ E5 x0 wcyclical downturn, the degree of structural weakness appears
$ U6 S9 x% Q. L% Llimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
4 s" z& H# ]6 q/ d* lhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
  g3 u2 v( w7 h& v# Freach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
9 f1 b0 I8 O' Bresidential construction in B.C. will definitely droop, we
) A% u( q1 y* Uanticipate that the West Coast will continue to benefit from
" p( ~9 h4 ?% L2 linter-provincial and international migration over the coming
  g9 [) b# R9 F9 y/ ryears, which, along with improvements in affordability,
2 c' U; \3 E* V  z$ wwill alleviate some of the pressure from overbuilding.
, \9 w. i  ^+ _- _0 X3 h. X' YOVERPRICED AND OVERBUILT: CANADIAN HOUSING
& @; O& s/ b+ h6 M2 m: SMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
2 D) w( l" A, [6 i' `/ o* ~: c416-982-8063
/ N. r, j' {% W- y" HPascal Gauthier, Economist
416-944-5730

0 T. B" ]+ f; \" D9 ]$ Mhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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