TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
3 T6 s- L5 {( {8 I) o& d9 I% [from 2002 to 2008, unsustainable price increases drove
/ h( H  s3 u; y$ ]5 `unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
/ N8 A/ H2 ~$ \4 T' H, Joverpricing compelled a level of residential construction
  f, \5 Z) M4 W) I; ~that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
5 ?) s& t" k+ J! G4 Lthree years.
8 w% U; R4 U0 ?; s: DBy “overpricing” we mean that prices detached from
* k4 y# s% G* n) ?their fundamentals, as witnessed by a steep erosion of
# ?+ Z9 o1 [4 l/ k" i+ \+ Eaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
* A$ g7 o, i3 L5 {3 ]We consider “overbuilding” of two forms: “demanddriven”
! S/ n( g1 d- q1 h' jwhere homebuyers buy up too many houses and
+ S8 U6 S- Q7 U& T+ dthat this demand cannot be sustained; and “supply-driven”
% J6 b. ~" U* G; J+ Jwhere builders accumulate excessive inventories. Although
' k$ o; Y( Z" v+ pthere is evidence of both types, we contend that Canada’s
2 m) ]2 }8 e/ }9 Q- Z; k“overbuilding” was mainly of the first type, where
$ V9 f; w+ Z! h5 a: e. S1 dhomebuyers 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
( a' z4 s( R" ^% ^on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
4 o* P+ j  z  jis now undershooting fundamentals and we expect this
' _1 A$ c: F: w' }: M4 T/ yto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
: \% }6 }" H% @. J8 e: ^125,000 starts over 2009 with a trough around 115,000 units
/ B6 y2 I" F' e8 ~% D. R% Nin the fourth quarter.
9 m% ?1 w4 y! z0 KTo quantify the degree of overpricing and overbuilding,
9 E- m+ V' Q+ Qwe first develop an empirical model, based on long-run
. M4 Y8 Y% z, |. hfundamentals of house prices and housing starts in each
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
2 m9 K& a, I5 J7 L! B7 C! xregard housing prices and household formation as the drivers
* @7 n* ]6 b, A2 q' R- ?2 ]: i7 Zof residential construction.
To examine the degree of overbuilding, we employ a
# P2 f3 |$ a2 w" C7 X' M9 c“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
$ b* }; M9 K. @7 K2 Z( `optimally. We find that actual homebuilding exceeded this
4 p& u6 b/ }6 B* Ofundamental-justified level by about 12%. Although new
+ T1 s! ]+ b2 S" I2 z+ g* ^units were being absorbed, homebuyers simply bought too
% X8 @5 B, j! j1 ^2 z; [3 ~6 V7 Mmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
3 f4 ^' ~* k2 R4 ?7 {3 l* Rpopulation inflows. Saskatoon, Calgary and Edmonton are
. U5 c1 O0 m' h/ I( [' W5 g! dalready witnessing surges in their unsold new homes at the
0 X5 z: g3 L7 \, c) l- R) F0 C2 B- jvery time that the resale market has swung into strong
  R; s) r) _* n0 \+ t) Vbuyers’ territory. Homebuilding in the Atlantic provinces
. @5 Y- |* ]3 {+ A. j6 H6 {has been relatively balanced but, while not plagued by structural
. D1 T- r" t7 c2 |. P+ c2 S- Nweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
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
" [% e* ]" Q  p( L& s! D' p9 X2 frates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
' J$ Z$ z6 A4 i* w" Zhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
2 [3 Z: l- h; X4 ~) wcyclical factors would indicate, condo inventories could
# d2 r+ d# L4 K3 k8 uspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
0 B2 U# j# q/ `& E; w8 Y3 F2 H7 Ganticipate that the West Coast will continue to benefit from
9 Y% L& d, P# B6 Ainter-provincial and international migration over the coming
9 O6 _" D7 w# F" j1 x( O( W+ Xyears, which, along with improvements in affordability,
& f# s& V9 r. L7 d# @, O$ Pwill alleviate some of the pressure from overbuilding.
; F2 v, x# ~+ X6 V. o. D0 J0 L6 SOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
, {9 `7 i4 `; y$ I2 F" r( tGrant Bishop, Economist
1 ~' X  x. N4 j% {' g) n9 S4 B2 R416-982-8063
Pascal Gauthier, Economist
416-944-5730

- P& ^0 s5 G/ d" @/ bhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙