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
$ q- ]; Z1 X& I% G! e6 ?* ]overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
! ?# `; z; z& F9 l2 U3 b7 M# {three years.
& M% C8 Q/ A& E$ L0 \By “overpricing” we mean that prices detached from
+ F$ I, s* \9 |3 S2 I. otheir fundamentals, as witnessed by a steep erosion of
- s4 z2 r: s; ~! d  r5 Xaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
4 I. M1 t) q+ d. |We consider “overbuilding” of two forms: “demanddriven”
4 \+ t) V# ]  C9 l$ @1 p6 Z8 W/ L2 rwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
1 {+ s+ b$ y! W8 P# u8 mthere 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
6 t. L, `' i3 Gthat is now being rapidly reined in.
2 s5 W3 |' w# |! eWhile 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
on markets over the next few years. Even as Canada recovers
) o6 H9 z. B/ w/ G& zfrom the cyclical downturn, house price growth will
  S1 e3 J7 i( U: [$ g- u  gremain choppy and new residential construction will be
3 v* _6 D$ {$ q/ Q( r$ Y2 F6 S; edampened, owing to this structural weakness. Construction
) D# w1 g6 I( T/ G: q6 dis now undershooting fundamentals and we expect this
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
in the fourth quarter.
- Y& b" H2 H) n( ?/ p2 Z7 r; Z0 ]/ vTo quantify the degree of overpricing and overbuilding,
% m9 j8 T! `- b) n( O$ K0 Hwe first develop an empirical model, based on long-run
* M) i0 s0 h# t! X" |fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
# A5 ]/ g5 c3 i3 Ovalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
) r& ^- N" q  F& s9 a# r  Z' R# vregard housing prices and household formation as the drivers
) [! J. G& Y, ?  gof residential construction.
8 e. |$ N2 Y0 t& GTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
* N: A( B8 x( x$ o, Uwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
+ n& z6 a7 c, @( G, L3 _0 nfundamental-justified level by about 12%. Although new
# Y$ W" Y2 L" \( `units were being absorbed, homebuyers simply bought too
! A/ T/ E# {1 _' i' Q$ Umany houses at prices that exceeded fundamentals.
; e9 z, h. L* m$ M; c9 u0 ORegionally, we see the greatest strains on the Prairies,
9 r. ~/ W- B4 n9 ~/ U( Lwhere housing demand will further contract under waning
* _# o& d, z* S3 s* opopulation 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
. i  L. t! q, z# H2 rhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
4 O6 Y$ }8 V6 b1 y+ F$ X+ RQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
1 @6 A( U6 u# {% [7 j& ZMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
: U# k# @/ F: n  ?) v! a7 J3 urates. While Ontario homebuilding will reel from a
+ I# m6 |5 q/ G3 Mcyclical downturn, the degree of structural weakness appears
. `$ m- I' \, s' A$ ^: N; Z0 a' zlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
1 f( Q- ?- b2 g  ^' m) Nhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
' Y, L; B+ M0 {, L1 J, n: W/ S) Mreach completion during 2009. If absorption rates fall, as
& K) ~# W" {! Z9 T/ Hcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
0 i2 i" D: k" a: g- k' l3 Jyears, which, along with improvements in affordability,
3 c9 V8 h8 I  t- O1 M1 ?9 [0 {( U% jwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
' Y1 `2 z" k4 y" f) j1 v2 ^MARKET RETURNS TO FUNDAMENTALS
( i5 H+ V4 f0 m  O! u  |Grant Bishop, Economist
6 b( ]' l2 Q6 w- H4 W- @416-982-8063
Pascal Gauthier, Economist
416-944-5730

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

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