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
: E# _' j# q1 ^6 h" G: cprices exceeded the value of housing that was justified by
0 f8 d7 ^5 M# d1 Q5 mfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
; |0 i# p$ W1 U7 [' I$ n0 d: o2 ythat 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
7 U& t2 H# l: z6 D: T1 waffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
) w1 R5 B7 l' a% v0 vwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
8 y* h' z( l; F" l# I+ J* [. jwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
4 o8 F# @( |7 W8 e$ I; J. H9 i/ ahomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
& H* m0 G9 N0 y3 f) J( ]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
/ U/ E  C* w/ t. H1 Gfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
- W/ h4 ]+ c/ B$ s3 a. |3 S0 Eis now undershooting fundamentals and we expect this
$ s* F. p' @  R; }0 S) b8 V% f' Lto persist over 2009 to 2011. We anticipate that nationwide
( G0 w8 K3 Y8 w( {' D# @- vresidential construction will fall further to around
125,000 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
8 S4 f# V1 ?: \4 @$ b7 Efundamentals of house prices and housing starts in each
+ P& t* I/ Y2 ?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
+ l- v0 F  t# g  [- x# Uregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
( ]( P' ^1 i5 [, T$ }“counter-factual,” asking what level of residential construction
- h  G) d- u8 K' q; W9 r* r% Nwould have occurred if housing had been priced
# q7 M2 c! D. |4 \/ @3 T4 Uoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
0 P0 e3 u% L1 y8 }5 b% wunits were being absorbed, homebuyers simply bought too
' _; G3 t3 S$ }7 `, Mmany houses at prices that exceeded fundamentals.
, Z2 m9 a) S" ^) i* {+ BRegionally, we see the greatest strains on the Prairies,
; f8 _& u/ d5 \8 r" Z6 Jwhere housing demand will further contract under waning
. G8 `8 h" ?2 b; s9 |: upopulation inflows. Saskatoon, Calgary and Edmonton are
9 C  ]8 ~. M6 d! lalready witnessing surges in their unsold new homes at the
7 f: y+ M, l! A6 ~5 svery 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
weakness, will be singed by the downturn nonetheless.
; j! P9 u+ x+ b, j" kQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
- `7 b, M  u# \6 E+ P# Z! H+ }! Hgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
  V; u3 ^8 c6 _6 ucyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
# W& ]( m6 M7 F: T3 nconstruction mean that record numbers of condos will
  v; {+ I/ l8 X+ S6 Dreach completion during 2009. If absorption rates fall, as
* @) ?6 G# Y* v# i- dcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
; Z$ a- m3 G1 ^0 D8 G& l. r) oresidential 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
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
, l8 R$ O7 Q0 v6 @$ dOVERPRICED AND OVERBUILT: CANADIAN HOUSING
. _! v: @7 N6 l5 k  x7 ZMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
( H# r/ w9 d( X- u1 O6 ?Pascal Gauthier, Economist
416-944-5730

% I5 ~0 |& W2 d7 s5 W2 N/ D' Chttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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