TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
+ F. @1 c9 F, t: z0 c4 u: |, nfrom 2002 to 2008, unsustainable price increases drove
1 l) a. d5 R+ s3 ^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
overpricing compelled a level of residential construction
that 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
  h3 W9 E1 P; G. I' t& rtheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
5 H+ |# {+ G. B* [# Dboth a cyclical downturn and a return of house prices
9 ?3 I5 ~1 a  a8 `! }to fundamentally justified levels.
( g) N, t& G* Z. ^2 k0 x, G% mWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
# |9 C" Z; {4 G+ `) uthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
- i1 g7 K* ?7 n* C5 P; k: N3 N: vhomebuyers pushed homebuilding to an unsustainable pitch
0 `' i1 D: w4 N; W( {8 Sthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
3 ?5 F, D; l, d# _: b& r8 mthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
8 L9 W9 l1 ^4 E" don 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
- w1 [3 `4 T4 sis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
" `9 P7 t* k$ R3 v: F/ u3 Presidential construction will fall further to around
) \- c" R3 A; |; j% E0 [125,000 starts over 2009 with a trough around 115,000 units
5 R% z+ C2 `3 B* zin the fourth quarter.
. |" I3 H6 e0 fTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
$ k- X0 x( B" E% l5 bvalues since house prices should track incomes over the
4 O* u3 B& H& N) Glong-run. Since homebuilders build to meet demand, we
; t) P% m9 U5 z, }regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
5 G- w, t9 K& z& B: U9 a2 T7 e“counter-factual,” asking what level of residential construction
# |. p& `' ^* u; e" e5 ^would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
: _( T" l& T5 P1 f1 e1 u. p( Fmany houses at prices that exceeded fundamentals.
  U" H6 w- ^6 i5 z1 o+ }& ^Regionally, we see the greatest strains on the Prairies,
- |! r+ i3 @/ C6 l5 K$ Kwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
; o( Q! q# X/ Y# ?very 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.
$ g1 x; F. G0 G# \  R9 t. h) EQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
/ j$ c$ s# X! v9 B" KMontréal – but recent building has been relatively balanced,
1 r; K; l7 y1 q7 E1 igiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
7 D( C* u* p3 [) r. P, O7 ccyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
6 F+ Z2 `0 e/ j) Q' Q" f9 z* hhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
8 L4 L/ O8 E& p) A. b* H0 jreach completion during 2009. If absorption rates fall, as
0 s4 g% ?- N: k* |! Q, |cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
& [5 G1 r9 c# G; M* ^" y& Zresidential construction in B.C. will definitely droop, we
+ O( u  L9 o% e4 a/ Y/ x  e$ @3 Xanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
' F6 \# F' l" v/ }years, which, along with improvements in affordability,
' P/ n1 O  t7 e  Iwill alleviate some of the pressure from overbuilding.
4 e& m8 z) O/ h6 ]* o# f7 E3 aOVERPRICED AND OVERBUILT: CANADIAN HOUSING
  y* X! Y/ d9 ^# D8 DMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
" ]* t3 ~+ x; ~1 C7 n1 ]416-982-8063
Pascal Gauthier, Economist
3 C: l! X2 j5 ~* B- c8 u416-944-5730
+ i0 ]7 m6 ]0 ?
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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