TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
. X7 i: ^5 J) vfrom 2002 to 2008, unsustainable price increases drove
3 V. ]+ j5 v% T& J7 Runsustainable levels of building. Our view is that house
7 J, F8 x, i0 L* w2 @prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
9 g8 R" [$ u  r. J0 Zoverpricing compelled a level of residential construction
' P+ e8 @! B3 s4 \, Lthat exceeded its fundamental-justified level by approximately
5 Q" ?# q4 N: _5 q2 b% f* Z/ K12%, 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
# \1 V+ w: X+ }9 \/ eaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
6 C; _" {5 l) v; B9 {1 V7 GWe consider “overbuilding” of two forms: “demanddriven”
0 n" t4 Q: Q( H; b) `where homebuyers buy up too many houses and
$ q7 ?( u# J8 O; g. e4 Lthat this demand cannot be sustained; and “supply-driven”
5 i5 h" L$ J4 }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
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
7 [1 c2 `7 z" u: cmeans a deepened slump. This overbuilding will likely weigh
$ s; E5 u: K$ M- Uon markets over the next few years. Even as Canada recovers
/ W, L# l( z8 J) N4 o% [" k3 Ufrom the cyclical downturn, house price growth will
9 v: c. X8 k0 \& C6 v8 Zremain choppy and new residential construction will be
% f/ U# Y& M+ W8 T$ S$ xdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
3 E! A( R  r& b6 j9 U  m8 m5 x  Rto persist over 2009 to 2011. We anticipate that nationwide
/ P5 z( |  R0 fresidential construction will fall further to around
& o' {$ F5 I5 j125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
1 d( s3 o" M( H8 W) E  Gprovince. Affordability is the key concept behind home
# c" z: V8 ^# k- L7 c$ O5 @, [: Zvalues since house prices should track incomes over the
1 B0 I. m0 }# olong-run. Since homebuilders build to meet demand, we
: Y! x% ^! Q% L3 A/ y: Q  s0 c3 E- Hregard housing prices and household formation as the drivers
! o4 W1 X2 F+ T/ M2 Pof residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
7 |7 x% c6 f" d2 C+ \0 l0 toptimally. We find that actual homebuilding exceeded this
3 P: K" y- O: hfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
2 w6 p) t/ t0 i$ `) kmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
; |: O. }- U" q7 ]  {1 I! ?where housing demand will further contract under waning
4 v0 @; V9 q5 W2 P8 n  L' s& Hpopulation inflows. Saskatoon, Calgary and Edmonton are
  j4 t, |2 W; `$ V# w: ealready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
. J) w1 ?' N2 l  [; A7 o8 n" lbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
( X3 n, ]/ l. \% a( i0 Aweakness, will be singed by the downturn nonetheless.
8 ~& u4 G$ o' I4 K" }) nQuébec 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
rates. While Ontario homebuilding will reel from a
  z& I1 b  F: Y* R, L- icyclical downturn, the degree of structural weakness appears
7 N0 l3 U6 `8 K' Z5 nlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
0 B) r* T4 y: S8 q* _$ {, B) K4 Ahigh levels of apartment-style units presently under
6 F. e# }  h6 Kconstruction mean that record numbers of condos will
( H; n8 j- c) f# W" B0 Ireach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
. |, G9 C0 ?$ f% @- V" w3 D! v2 yspike severely – particularly in Vancouver. However, while
) A+ r9 C* W1 f# I3 k; Yresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
( o4 E' W9 R" \6 |' kinter-provincial and international migration over the coming
8 e! L5 [& H  K  s0 Xyears, which, along with improvements in affordability,
( h% R1 v. N7 g, |. hwill alleviate some of the pressure from overbuilding.
" Q( l( M" b7 b7 AOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
3 N! j* }, }& @/ A8 L! {! n/ u1 `416-944-5730

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

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