TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
" e1 c: H' F4 p1 A4 c0 Ufrom 2002 to 2008, unsustainable price increases drove
  e9 ~( N7 l) x; Y3 Y, l6 |) zunsustainable levels of building. Our view is that house
* q6 u/ ^* A' ^prices exceeded the value of housing that was justified by
; f4 K2 W: n7 n6 b7 J7 ofundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
8 X- U: Z, X! x# C& d+ f& y: [# T* Zthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three 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
to fundamentally justified levels.
1 v( s& Z; y7 PWe consider “overbuilding” of two forms: “demanddriven”
. ?0 C) q; _& a& Zwhere homebuyers buy up too many houses and
% E0 b" T8 y0 e! a+ ^4 jthat this demand cannot be sustained; and “supply-driven”
7 D" w0 @$ }2 k4 Bwhere builders accumulate excessive inventories. Although
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
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
means a deepened slump. This overbuilding will likely weigh
$ |6 Z, _1 ~+ b( D4 V5 Uon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
; Y; i6 u+ \% P! N1 _$ Tremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
, K$ H# T5 M7 {! i7 gresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
. ?$ g$ ~5 T: l  I8 |( GTo quantify the degree of overpricing and overbuilding,
7 W. Y0 v. ]4 y- L2 H( Vwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
2 Q; D8 f. Q# Y6 J) h$ Ilong-run. Since homebuilders build to meet demand, we
+ W8 ]* d- X/ M2 wregard housing prices and household formation as the drivers
8 Z$ M1 o) m( h4 W$ Qof residential construction.
& \3 ^2 P7 @2 l" Q8 LTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
4 u; A+ s% F/ {: Pwould have occurred if housing had been priced
$ l1 N) I) ]7 E% l7 l% Z  ]optimally. We find that actual homebuilding exceeded this
. G. \2 W" Y7 l% {) @fundamental-justified level by about 12%. Although new
8 P& {4 k) |5 Q5 D; \8 ?& `units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
0 `. W' u* x- h3 V- bRegionally, we see the greatest strains on the Prairies,
2 e, ?2 e4 e3 z5 wwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
3 v- A+ M9 ]* p" @very time that the resale market has swung into strong
! D1 Y5 P" |7 J8 ?& wbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
: b( o# Y* C  z) m" A% Qstrange 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
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
% x" u' M9 d1 M/ R" P+ ycondo market. Both in Toronto and Vancouver, historically
+ ?3 Y/ I- d  J4 Yhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
, [* l2 {% @3 U3 N2 Qcyclical factors would indicate, condo inventories could
) J/ _3 j. [$ y" k* Q) y2 Ispike 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
" `7 v+ k: e6 a/ v, Dyears, which, along with improvements in affordability,
# m. r% }# i  [0 R" twill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
6 U6 _3 h; c1 g9 A' q6 a* WPascal Gauthier, Economist
416-944-5730
* }5 D: {2 T+ s% N) L
, |% ]8 l; x8 n; H% h' rhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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