TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
7 V% X# _, h9 @from 2002 to 2008, unsustainable price increases drove
5 n0 @+ `! e! ~3 S" N; m( I) dunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
1 ~, r8 ]0 J% M. x0 j8 cfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
, Z0 r3 F: Y2 _: i4 _. Jthat exceeded its fundamental-justified level by approximately
9 ?% |( m4 c1 ]% h3 q' N1 n) H/ {12%, an excess that was exaggerated in the past
( |5 @  j$ j; j* [) mthree 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
! _, K; d8 `( C" ]both a cyclical downturn and a return of house prices
' d+ P( L! {& Q5 U4 p( L# a) dto fundamentally justified levels.
3 {1 x8 k& v, {8 w1 VWe consider “overbuilding” of two forms: “demanddriven”
% b) L  d7 }( D4 C3 g8 P6 Kwhere homebuyers buy up too many houses and
* O6 {* S0 o1 Vthat this demand cannot be sustained; and “supply-driven”
' j3 \- u2 j. b4 y( Z# |$ }4 vwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
4 @8 y/ I; x( S$ jhomebuyers 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
on markets over the next few years. Even as Canada recovers
1 X/ I) j! o! h! j( Jfrom the cyclical downturn, house price growth will
5 d( R( w# B8 V+ yremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
4 h( M% a; O. j5 Eis now undershooting fundamentals and we expect this
" t9 c1 j3 N, Q" o0 [4 o' A/ kto persist over 2009 to 2011. We anticipate that nationwide
' v; X, M3 S) d2 L; Nresidential construction will fall further to around
' m" V& t2 W- q125,000 starts over 2009 with a trough around 115,000 units
0 u( S! ^  G: ~. L: M& xin the fourth quarter.
! j. m/ J0 F! z( l1 d% RTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
* U) d5 x& H) N: _fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
9 L0 h2 k  Q2 l8 @$ Fvalues since house prices should track incomes over the
& r8 U6 ?+ A  O7 J9 w( ]long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
) ]4 K) a7 D( x/ J* b: bof residential construction.
5 h9 @. \8 X4 L: O! w# HTo examine the degree of overbuilding, we employ a
! g2 q0 W" V9 h3 x0 ^  H“counter-factual,” asking what level of residential construction
4 i3 i' [! l: D; ]would have occurred if housing had been priced
' L1 k1 r5 k; J9 j6 i7 zoptimally. We find that actual homebuilding exceeded this
' x; K2 g8 G. S; w4 ]fundamental-justified level by about 12%. Although new
0 R) i0 g$ X; e2 l' i' punits were being absorbed, homebuyers simply bought too
& I0 t6 G5 _6 t$ [4 Z3 t: ?( }# Tmany houses at prices that exceeded fundamentals.
9 p+ L+ p$ h1 X2 U) D% E6 f  ARegionally, we see the greatest strains on the Prairies,
7 u/ ^" b6 ]7 Z& A# Jwhere housing demand will further contract under waning
% X6 c- v+ n8 P2 J+ `population inflows. Saskatoon, Calgary and Edmonton are
! R- T$ R- o" G9 F6 aalready 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
& f0 O% C6 q2 W0 h2 Ghas been relatively balanced but, while not plagued by structural
6 t( o5 j( @2 Vweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
* E. n: h" @7 M/ I# \% ^. `strange accumulation of unabsorbed multiples on l’Île de
* P' F; [, B. L5 eMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
8 ]$ ?% v7 ^# a5 p4 O1 e) S% prates. While Ontario homebuilding will reel from a
0 i9 R% T  T) u# d5 u" p, Wcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
; p7 F, S: |/ a! B" y( `4 ]3 ^condo market. Both in Toronto and Vancouver, historically
4 F/ r4 F7 M( V! Ohigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
- b% A0 f, U' ?5 h" e6 u  c) espike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
+ D$ h5 d, Z' y' F: M2 g9 s$ Aanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
8 E7 Q4 X. N% ]* a7 e# [will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
5 d) _3 N  d; b: f6 f# z* U9 ~6 I416-982-8063
Pascal Gauthier, Economist
3 G8 ~; ^2 d' B3 T( E& |416-944-5730
, t' \, F+ f% E. J* X
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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