TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
$ t  b+ I4 ?. \# |from 2002 to 2008, unsustainable price increases drove
# Y) ]. {% m5 Tunsustainable 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
$ R/ ^& C2 G) S. s* a1 f7 W, [  fthat exceeded its fundamental-justified level by approximately
0 Z9 O3 `- M1 v  R* E6 r12%, an excess that was exaggerated in the past
three years.
: [4 h2 A( z4 c8 l; ]By “overpricing” we mean that prices detached from
- |2 Z' U7 G( D( [( F( btheir 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
: H9 \, p+ P. T5 Pto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
4 _$ `# F& A, M7 h( q0 h- M" `where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
* o+ f# U- A9 j& s  ]where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
. a! x" G9 B" L5 a! Z4 C5 T  Y7 lhomebuyers pushed homebuilding to an unsustainable pitch
) t$ n4 Z8 D! qthat 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
means a deepened slump. This overbuilding will likely weigh
1 L! d! W* B" U( pon markets over the next few years. Even as Canada recovers
8 ~5 H0 r4 y. w8 {2 P/ dfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
  m$ ]! U4 H; K! A4 {to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
/ H" R" S5 l# M: M- t7 l# x$ [# uin the fourth quarter.
  z. Y  U5 @6 UTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
+ h5 p5 B  a. B* S3 j( e. X! zfundamentals of house prices and housing starts in each
0 P" z% @( y1 B! O8 Y& I: Hprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
6 K3 L5 _3 K  s# G  G$ w: eregard housing prices and household formation as the drivers
of residential construction.
! H7 y# y9 s/ S$ _6 OTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
* [7 m5 f1 t% N7 ?+ }would have occurred if housing had been priced
3 w+ K0 H4 Y1 F0 n  |optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
$ r3 O- z# [% ~/ g! d5 wmany houses at prices that exceeded fundamentals.
1 V7 q7 k! F$ Q: L, eRegionally, we see the greatest strains on the Prairies,
6 a/ @: h! Z. t1 X$ Kwhere housing demand will further contract under waning
$ Q/ Y! d$ Y% Y0 E' E' y) npopulation inflows. Saskatoon, Calgary and Edmonton are
. m! z8 Y5 y# {+ u) m; ~already witnessing surges in their unsold new homes at the
2 S  x) ?9 i7 |' f# dvery time that the resale market has swung into strong
; t5 n# `8 ]/ j; i  Y& V, Vbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
. G' Z+ B' @  Nweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
, k  o/ W, }) a2 p! Fstrange accumulation of unabsorbed multiples on l’Île de
* k+ e# v& F/ p$ Z0 j7 @3 yMontréal – but recent building has been relatively balanced,
( p  D, P& N2 i8 b; e5 Ugiven the province’s history of under-building and low ownership
! t8 h% z4 f  Nrates. While Ontario homebuilding will reel from a
/ T% }. h6 s# |6 H1 ncyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
2 m9 N0 ^! B# d% v% ~condo market. Both in Toronto and Vancouver, historically
8 ?0 F+ D5 g: s1 Fhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
% m: F3 S1 H  y1 a  o2 freach completion during 2009. If absorption rates fall, as
5 Q( P2 w  k$ [6 T) H, Fcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
1 i1 J4 j) U% d3 Bresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
3 j9 \* H4 ~7 t0 E. h3 Sinter-provincial and international migration over the coming
) }' K, y3 ^2 A5 e: p9 l2 ^, s1 q. Myears, which, along with improvements in affordability,
" R* E% |  [+ s* ^' Twill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
. Z; N5 _( X, h+ i. }4 t( iMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
, \1 Y( X7 y1 }Pascal Gauthier, Economist
* ]4 m7 Z! A, s416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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