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
unsustainable levels of building. Our view is that house
! q& z. {& l9 ?* S/ }, V' Yprices exceeded the value of housing that was justified by
: s4 s( h  V9 q1 E5 Q2 E2 A, ]fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
! L2 m% n/ X/ fthree years.
) n, ~/ z3 Z0 `By “overpricing” we mean that prices detached from
$ {, a) H" j  etheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
+ m; @" I9 M' o. m1 Y* Wboth a cyclical downturn and a return of house prices
5 N0 r5 s1 u. a' Tto fundamentally justified levels.
  H( Q% s9 \6 X' O. y7 B0 YWe consider “overbuilding” of two forms: “demanddriven”
) N, r' e3 D; l! i% F$ ]! Cwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
7 R3 a5 k1 c9 Q% ^1 A+ y3 ]“overbuilding” was mainly of the first type, where
5 F& l, F" x9 C8 F4 V+ K& Shomebuyers 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
from the cyclical downturn, house price growth will
- v8 n8 x5 G/ X* H" ^remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
) _1 w2 N; r; h- o" W6 K/ uto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
- ?. r3 a/ l  n5 l4 D* E8 Z" P125,000 starts over 2009 with a trough around 115,000 units
6 j' t- H; X; l4 J! \9 ]" uin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
; W* `3 ^2 A0 Y9 J+ Ifundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
& h0 @7 ]9 E, p* Tvalues since house prices should track incomes over the
2 P* R5 {! {: T9 [, X/ ylong-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
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
1 b5 l" {1 w( qfundamental-justified level by about 12%. Although new
; C- R- ~+ N/ N( n) cunits were being absorbed, homebuyers simply bought too
0 U* G- [$ U6 R" Q; Z3 D0 ymany houses at prices that exceeded fundamentals.
/ L: R1 K  J3 U8 Z" W5 d1 }Regionally, we see the greatest strains on the Prairies,
( {( x: r9 T" R, N1 H0 k* Zwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
! {1 w" @% f# q# R# y% U; u5 Y" calready witnessing surges in their unsold new homes at the
+ `  p( G$ P  l+ ivery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
9 ~  r" b2 U. q0 m9 a% }- tweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
+ K2 m/ G% F0 {( J& estrange 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
$ F3 A: U1 {5 W& @3 U1 ~2 B5 \cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
0 H# g# U* `8 ^! `0 ncondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
. F/ V" g4 l' ~7 z4 Rreach 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
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
) Z4 ^: K# g2 f$ Vyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
! V( a( _! |7 W# |# _- `- ?OVERPRICED AND OVERBUILT: CANADIAN HOUSING
. Y% A7 _  L4 B, EMARKET RETURNS TO FUNDAMENTALS
; T3 x) g- P$ U  ?$ p! _0 J4 eGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
, W9 Q6 h$ @8 A" ?
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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