TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
, F( u6 k# `( }4 i. X' ofrom 2002 to 2008, unsustainable price increases drove
- r5 h6 ^! N  @7 t- v% h  zunsustainable levels of building. Our view is that house
" f3 A; _" i2 B; p1 N7 ^prices exceeded the value of housing that was justified by
: k+ y& X7 u! {) afundamentals by approximately 9% nationwide. This
; L  X6 h( X  v0 M  `  r, w. moverpricing compelled a level of residential construction
" I# ?' k- Q; o- w  Tthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
. C) q/ I2 H3 N8 E, VBy “overpricing” we mean that prices detached from
& j/ _9 e* G- b4 w; l% `their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
* p% l; w4 J9 \to fundamentally justified levels.
7 N. @# k& C( D. M" aWe consider “overbuilding” of two forms: “demanddriven”
) _5 X. h( X1 \4 L) v# rwhere homebuyers buy up too many houses and
( G* A6 i  c$ G. P8 l) }/ nthat this demand cannot be sustained; and “supply-driven”
2 j' L: ^  H# ywhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
) d3 X1 y# s' \8 khomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
, e7 B# g8 p+ g) n" s) R$ sthe 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
: H- ~* y1 a$ F8 E3 nremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
& Y  a. b3 f* d. ^! k0 t5 Mis now undershooting fundamentals and we expect this
7 x2 m. I0 d  S/ _7 y5 V6 t: j& ]% Uto persist over 2009 to 2011. We anticipate that nationwide
' {" P8 a; @1 _, r# q( b  Gresidential construction will fall further to around
% [1 Q9 ]: |1 A0 Q# \: D9 Y125,000 starts over 2009 with a trough around 115,000 units
7 i5 c+ a' J. \6 V6 \& C/ i- iin the fourth quarter.
7 i) d, N& s/ n" L& DTo quantify the degree of overpricing and overbuilding,
+ t. V+ x3 E1 R: zwe first develop an empirical model, based on long-run
6 m7 m. X+ N5 R3 l6 |8 Cfundamentals of house prices and housing starts in each
& d- z4 {5 ]/ x. A( xprovince. Affordability is the key concept behind home
: Q  |4 y2 {( L3 T& nvalues since house prices should track incomes over the
% t0 Q2 @7 E& G& N2 y, ulong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
& V! v( N1 r  D5 QTo examine the degree of overbuilding, we employ a
, I3 S- c4 d4 L0 c( a“counter-factual,” asking what level of residential construction
' X% t+ V  u2 g4 kwould have occurred if housing had been priced
+ I- n, u& j3 e: E% I0 f$ @5 ^# noptimally. We find that actual homebuilding exceeded this
0 _7 w& k! A0 ]( A1 gfundamental-justified level by about 12%. Although new
( l$ Q8 m2 a' C1 funits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
2 J8 m* I. `. W9 QRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
; ^: |+ k& `# m3 R  H6 d0 talready witnessing surges in their unsold new homes at the
( L0 W# M* W% Y! B0 e. y/ pvery 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
. q6 ?# m  h9 D7 e: \weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
( N, o& @  D/ x8 \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
, ]& v. F6 U! e1 h# Srates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
$ R4 Z( _  z0 j% S' ~! Nlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
% e  i/ @3 n  o% Uconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
" u/ h- _  z: S  Wresidential 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
4 T& b) D# T' g( Lyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
. [) |1 F: ^. g2 x! a0 k$ jMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
) w9 {; S/ e+ V416-982-8063
Pascal Gauthier, Economist
3 C; H9 ]2 M5 H6 c416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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