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
% m6 B) c. ^' e  m% Q& ]( vunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
* e# v; ^) o6 k0 W2 g  u- t9 W. Zfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
0 c2 C  I5 t6 e5 J# X12%, an excess that was exaggerated in the past
9 B5 A& m; \( [3 U* M2 m8 M5 ^three years.
6 L6 v. D4 L: b4 [" WBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
9 Q, C) ^. R6 U# G6 W) Paffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
# |7 Y7 }$ `# d: nto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
' I, F! C0 h& q* y) y+ dwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
( V! R% n" @( y- C% @$ Pwhere builders accumulate excessive inventories. Although
* n4 H/ s3 y. k+ d7 T& s5 kthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
' e% \9 x! t4 I0 a$ Nhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
; \$ [, j3 K' X6 m  o8 ~# r. @0 pWhile 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
+ {/ k# p# l$ A/ M; d; V8 ^  [on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
3 n; W6 _4 q5 e4 aremain choppy and new residential construction will be
0 z, @( b: u* y$ a# Ndampened, owing to this structural weakness. Construction
* Z: L3 y: F5 ]# lis now undershooting fundamentals and we expect this
+ Q$ b2 p/ }7 H7 D# w4 X* Cto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
, S+ H) |  R* ~+ C125,000 starts over 2009 with a trough around 115,000 units
" C2 i( |" h' q1 g9 v7 W7 \in the fourth quarter.
' N- I) o7 A) g5 a1 l! PTo quantify the degree of overpricing and overbuilding,
; q& E  I! G: d) b+ [: O4 {" p, V' 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
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
+ d- V! K; k! A5 R9 S- s# t“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
/ c  B1 ^  }8 Zwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
5 w7 Y- I3 o6 x5 i7 F5 M7 `very time that the resale market has swung into strong
- f% j. G% z; b- r" ]* ]" }3 |2 R( tbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
! Y4 j9 A: E8 |9 i3 nweakness, will be singed by the downturn nonetheless.
Québec 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
& T$ l: O% M5 P% Grates. While Ontario homebuilding will reel from a
8 @5 H3 ^- `- T2 lcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
+ G$ O2 r# p, p1 Ehigh levels of apartment-style units presently under
construction mean that record numbers of condos will
6 @* h3 N/ p+ z. L* Creach completion during 2009. If absorption rates fall, as
0 p- K( A: F; g; n, |5 Kcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
, ]# F9 t' s6 d4 m9 O, F' U6 Mresidential construction in B.C. will definitely droop, we
7 X: L; ~5 D% R5 s& [anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
# A$ v3 f. b' b( S: D3 Hyears, which, along with improvements in affordability,
! h# c( `# M' Y7 |% o, I8 C, r- Xwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
5 ~+ V% e( Z( D" A1 ?  mMARKET RETURNS TO FUNDAMENTALS
9 A/ i$ K! l3 \3 i- e4 g" mGrant Bishop, Economist
416-982-8063
! @5 o% j- f2 q8 x: S( U* _Pascal Gauthier, Economist
416-944-5730
* K8 J6 |" z1 R0 G: A) t$ c
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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