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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly; |  Z# E! ?. z' Z
from 2002 to 2008, unsustainable price increases drove
) ]2 c9 q7 L8 D, e* R5 b4 L$ {unsustainable levels of building. Our view is that house- D' ^/ G; C4 H5 p) C: e
prices exceeded the value of housing that was justified by
" e% r: r" i+ R; X! c' b9 K: ^+ K$ Ifundamentals by approximately 9% nationwide. This( C0 i8 A  P7 ^% Y; Z- y4 j+ A, o! D- q
overpricing compelled a level of residential construction
* H9 I% z3 _# sthat exceeded its fundamental-justified level by approximately
$ h! l! B) F' s/ F+ b. W8 k12%, an excess that was exaggerated in the past. f: N: `; Z: x" n" t. R# R7 x0 o
three years.
% ^0 y  B, m: s- _& A) xBy “overpricing” we mean that prices detached from# o( D' Z+ a, |
their fundamentals, as witnessed by a steep erosion of; f6 o1 n# Z/ Y, |& \
affordability. The current unwinding of house prices reflects
4 Q" v5 r% V' ~$ p+ b& U! J- Gboth a cyclical downturn and a return of house prices
' E" H9 ~7 V# z1 d. Eto fundamentally justified levels.
; }  Z; I# P7 l0 _6 {/ b% S# M4 b  [We consider “overbuilding” of two forms: “demanddriven”
8 ~- G) X; Z1 |0 [" N5 M8 u" [where homebuyers buy up too many houses and9 n. d! z6 k$ [9 M1 i
that this demand cannot be sustained; and “supply-driven”- _$ |" L  I: I( I; o4 [
where builders accumulate excessive inventories. Although! C1 {# `% H& u4 o( w$ H$ l
there is evidence of both types, we contend that Canada’s+ a* o4 h! z  ]! J+ s# J
“overbuilding” was mainly of the first type, where! y- `6 S3 u  A  k$ p) a; J$ |3 ~* u
homebuyers pushed homebuilding to an unsustainable pitch! Z! T3 \9 @7 z/ {1 ?4 q) J+ C
that is now being rapidly reined in.$ u# B" F1 Z1 z, d; j
While most markets won’t face U.S.-style overhangs,1 I: `- b5 t$ L  d$ n
the construction of too many new homes over the boom/ q5 a8 `4 A0 v. ~2 B' U. z8 _" L
means a deepened slump. This overbuilding will likely weigh8 c* q) \8 x$ w2 {" t
on markets over the next few years. Even as Canada recovers+ b8 @8 I0 M4 ]7 N  J7 H/ w
from the cyclical downturn, house price growth will
! b# d7 h4 x4 b3 o5 S! mremain choppy and new residential construction will be
) a( L$ b9 c+ k  w; Qdampened, owing to this structural weakness. Construction6 ]- G1 Q0 m2 y& {
is now undershooting fundamentals and we expect this3 l! w* \) G/ g' h- n+ `
to persist over 2009 to 2011. We anticipate that nationwide
- e: D, S" s3 ?; Jresidential construction will fall further to around
* F2 y" b% P  T* y125,000 starts over 2009 with a trough around 115,000 units
/ |3 X3 F2 P3 O5 v$ `in the fourth quarter.
/ x( {* }+ Z& N) h0 BTo quantify the degree of overpricing and overbuilding,
% V; Q& _* S' u6 Z: r# i, Jwe first develop an empirical model, based on long-run( ^2 v! H6 D& |5 G& q
fundamentals of house prices and housing starts in each
- g! u  k4 ]$ y7 uprovince. Affordability is the key concept behind home
* C! f7 K6 R3 y) o  ~8 ?% d% _values since house prices should track incomes over the; K; z+ N% k% n" C
long-run. Since homebuilders build to meet demand, we. p# A7 T' F& K3 k
regard housing prices and household formation as the drivers$ I+ O6 j$ l. v$ w+ z+ M
of residential construction.
0 J! N2 F$ w  I8 K& CTo examine the degree of overbuilding, we employ a/ [- Z% i5 v, `4 C. i
“counter-factual,” asking what level of residential construction7 z: l$ n" _+ r& {3 j* z
would have occurred if housing had been priced
  c2 D! p9 m  moptimally. We find that actual homebuilding exceeded this
2 R& K5 B3 R& o! I, {$ Q  xfundamental-justified level by about 12%. Although new
' F- q7 R( {: J0 c2 C3 t; H  l9 sunits were being absorbed, homebuyers simply bought too  \  m5 i9 _! y/ b. \/ Y
many houses at prices that exceeded fundamentals.) o* T  K( F+ Q8 ]7 t4 j
Regionally, we see the greatest strains on the Prairies,
7 c( L. c+ E6 ?; B8 M7 n$ a# {where housing demand will further contract under waning
9 A+ F% I8 X; i4 ?( l3 b+ Spopulation inflows. Saskatoon, Calgary and Edmonton are
* J) n5 A, q, i* z1 s7 ?& Ualready witnessing surges in their unsold new homes at the3 s( i" b" p& d* N& F) d
very time that the resale market has swung into strong8 C+ N7 d( D7 C3 H# [
buyers’ territory. Homebuilding in the Atlantic provinces5 m  e: s% `4 M& S, H  j9 O
has been relatively balanced but, while not plagued by structural
% ?/ \: Z: y, Z5 v* Qweakness, will be singed by the downturn nonetheless.; t* C0 \- ?% [1 f: ]
Québec shows signs of strain – especially given the
$ w- x$ g: W/ rstrange accumulation of unabsorbed multiples on l’Île de. J/ `& h3 d% X' ?; ]
Montréal – but recent building has been relatively balanced,3 h4 W! Y* G0 u  C9 U7 O* ?
given the province’s history of under-building and low ownership
- f# n" t4 j- s% q4 d- y2 irates. While Ontario homebuilding will reel from a) P6 {, e, F$ ]3 J' v; U6 D: v
cyclical downturn, the degree of structural weakness appears
# j- X1 N+ g; u/ rlimited – with the important exception of the Toronto6 y1 u: z' a* i0 O' C
condo market. Both in Toronto and Vancouver, historically
' D' }: j8 ~' ~high levels of apartment-style units presently under
% g& n; o3 Q7 ]construction mean that record numbers of condos will
; F2 h" y: ]3 \. Rreach completion during 2009. If absorption rates fall, as
, y& `: a  p& Q) Vcyclical factors would indicate, condo inventories could- o- h/ ]. l$ U% t
spike severely – particularly in Vancouver. However, while
# _% m" O9 C; c. n5 `$ r  Z" q' Wresidential construction in B.C. will definitely droop, we
: \: J9 s* H3 g3 banticipate that the West Coast will continue to benefit from# j) F7 T' e2 y8 ]& M  B: |
inter-provincial and international migration over the coming
5 }9 ^2 k3 V7 r( W8 e7 Qyears, which, along with improvements in affordability,# s% L3 j/ F! m, v- g( F) V' H- o- m' U
will alleviate some of the pressure from overbuilding.' D8 c; g  V/ G, ]
OVERPRICED AND OVERBUILT: CANADIAN HOUSING- N! T& k' `5 F2 J4 I
MARKET RETURNS TO FUNDAMENTALS
1 h8 {0 c7 j, K2 X' o$ v! IGrant Bishop, Economist% |, A1 t- T  v: j9 L. u
416-982-8063
$ p+ c2 L! s$ j" A) T. H; b5 lPascal Gauthier, Economist
1 E0 k! F. i( w0 r; E# {  v416-944-5730
1 g, @2 B' F$ G% S, l+ ^1 N  F& q1 Q6 B  ?
http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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