TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- r% a9 K0 N: rfrom 2002 to 2008, unsustainable price increases drove
+ }9 r& e2 D0 ?! C* sunsustainable levels of building. Our view is that house
8 l- Y% |5 Z- X6 u( l4 F3 N0 Lprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
# b* r' w1 w' N! w' M' A( |! U  j12%, an excess that was exaggerated in the past
2 ?- C7 q6 b  k& X+ M; U* }6 x3 Lthree 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
# w9 O/ K3 q1 S8 J$ B. G3 Yboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 y9 ]. r- l$ z' ^' E" h  T/ Q/ Iwhere builders accumulate excessive inventories. Although
9 W1 `( _0 u- X, D1 ~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
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
4 p/ i/ c0 `6 _  P4 u6 _' P6 Tfrom the cyclical downturn, house price growth will
3 {1 I6 x( q( `2 }1 j+ Z" V* rremain choppy and new residential construction will be
- L2 s* Y6 N- g, tdampened, 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
125,000 starts over 2009 with a trough around 115,000 units
4 O% t# J: V2 A8 F+ S1 G$ Gin the fourth quarter.
9 _) x3 W& I, y, uTo quantify the degree of overpricing and overbuilding,
4 u$ i+ r, U! [1 N$ ewe first develop an empirical model, based on long-run
5 [( J8 B, G: sfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
9 y& d& `2 K- ~4 g, q' P4 x5 |6 m, a" rvalues since house prices should track incomes over the
8 s( }/ H- o# ~; |5 a. wlong-run. Since homebuilders build to meet demand, we
% E2 }1 w+ t$ X' P. q3 q; tregard housing prices and household formation as the drivers
0 V3 O8 T4 h& Vof residential construction.
To examine the degree of overbuilding, we employ a
3 K; F7 e+ D1 V1 l; k3 L" {, ~“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
; @; W7 T) n3 ~* doptimally. 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.
. q8 F+ q/ @' |* }9 Y2 E& {7 \Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
4 ^, g1 k( A  \' s6 a$ D' d! D( opopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
; {2 e% x3 i1 L' O4 c& dvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
0 X, \6 b3 D$ N0 M  \" x: q6 }, [has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
/ \2 d/ |7 @+ Y/ Z) |) Estrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
- {" M# b, k/ ~given the province’s history of under-building and low ownership
1 P' [) v4 n5 @1 k. t7 L5 |/ Prates. While Ontario homebuilding will reel from a
& w& h' e3 J2 b5 ~, `9 Mcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
& o: C* ~+ a# ^) Z6 _7 wcondo 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
9 s+ t7 {- w' R2 _1 pspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
1 D" ^& p* N' g8 M0 Canticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
+ C: t9 C5 Y0 Ryears, which, along with improvements in affordability,
: j" F4 _4 W8 w1 O* W! `1 U9 Zwill alleviate some of the pressure from overbuilding.
6 C: `: n( m9 M4 IOVERPRICED AND OVERBUILT: CANADIAN HOUSING
# i: v$ Q3 j0 w  `% Y" GMARKET RETURNS TO FUNDAMENTALS
+ ]+ s/ p) F% W! XGrant Bishop, Economist
( ~" V# @, _7 R0 F416-982-8063
Pascal Gauthier, Economist
* e2 M2 i$ ]) t; k" ^( a, v416-944-5730
. C3 D* \+ W. F+ H
" x& ^; D3 w1 r, I1 P! O( Thttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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