TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
# o7 ?0 a0 ]2 n& J  o1 ]5 kfrom 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
( O+ m0 M8 {% v2 f3 k6 [fundamentals by approximately 9% nationwide. This
# c8 s2 x" A% m" X' |overpricing compelled a level of residential construction
that 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
( M% a; ^' ~' ?% z# c1 f+ ~affordability. The current unwinding of house prices reflects
$ w6 s+ g) V( t$ A- m1 vboth a cyclical downturn and a return of house prices
9 i7 j, r# A7 {5 h9 Jto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
4 I; |5 H. x1 P% d- _0 \, Kwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
* v8 t! i4 Z, O0 ~$ rthere is evidence of both types, we contend that Canada’s
7 Z: \4 p, ~( A' B“overbuilding” was mainly of the first type, where
& z5 s2 B) @5 Y  j0 Q! Uhomebuyers pushed homebuilding to an unsustainable pitch
9 g8 O, g  c/ _$ [# ithat is now being rapidly reined in.
7 r' M3 u/ g# |# k3 {While most markets won’t face U.S.-style overhangs,
' Z3 B; R5 A5 A3 I- |# m5 Othe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
  ~1 y  j& F3 z1 a- `; don markets over the next few years. Even as Canada recovers
" U5 d9 ^' p* g* X3 i9 ?from the cyclical downturn, house price growth will
" s* \4 D1 @: Q  {, f, T! W! R! Jremain 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
residential construction will fall further to around
3 \. U1 P: G7 ^3 e125,000 starts over 2009 with a trough around 115,000 units
) r2 U( E/ n3 `! B4 ~: K' Ein the fourth quarter.
To quantify the degree of overpricing and overbuilding,
; d& l: e. J1 A' pwe 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
1 j& [& {3 d! Blong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
0 `( y/ Y- A  a7 b0 ~3 I' kTo examine the degree of overbuilding, we employ a
0 z& \" u& [4 T“counter-factual,” asking what level of residential construction
9 Y% w1 l. ?1 |, m7 J! _# M. _" G3 Swould have occurred if housing had been priced
' S0 \" M  S- |; Z0 zoptimally. We find that actual homebuilding exceeded this
# P$ t" d5 t0 ?; m  |1 ]) tfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
& @, }, L( }. @. P/ L0 _2 WRegionally, we see the greatest strains on the Prairies,
. W$ K5 y9 a0 hwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
. G0 K/ g+ h6 \+ l8 v! kalready witnessing surges in their unsold new homes at the
- w7 [" g8 ^, V4 x' A& overy time that the resale market has swung into strong
! h  _1 {& n* @! q( b5 t! h3 @buyers’ territory. Homebuilding in the Atlantic provinces
$ j2 A5 I( ~" S4 Khas been relatively balanced but, while not plagued by structural
4 _9 J% I) w8 ^6 ^3 H; H9 aweakness, will be singed by the downturn nonetheless.
7 O) D" O: |* b5 T& M" SQuébec shows signs of strain – especially given the
, R8 Z. f2 w) b* q+ z( bstrange accumulation of unabsorbed multiples on l’Île de
& O3 F; U- }' u  N, a2 v4 R. l5 PMontréal – but recent building has been relatively balanced,
; {) s, y3 ~: J+ ]5 k& Z. [given the province’s history of under-building and low ownership
6 J9 O, f2 y4 _8 S, c0 O) \rates. While Ontario homebuilding will reel from a
& Y5 Z+ |' O* s8 I! Bcyclical downturn, the degree of structural weakness appears
% W' d+ Z6 v- X( x5 C0 K6 s7 O0 Glimited – with the important exception of the Toronto
& b9 K' b- j) f2 `; U! }: r6 _' P; Scondo market. Both in Toronto and Vancouver, historically
high 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
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
4 i6 ]4 Z5 U9 _3 r: f2 W4 Z2 Qanticipate that the West Coast will continue to benefit from
& E7 \: D2 \" [6 p6 ?inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
+ U: G5 F( g2 ?' t* ^/ n1 L. P6 pGrant Bishop, Economist
416-982-8063
; M7 n; E( U' |+ T/ LPascal Gauthier, Economist
0 S( E5 ^" X& b" F/ M416-944-5730

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

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