TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
2 h7 A- j- F! b7 S: Xfrom 2002 to 2008, unsustainable price increases drove
7 z$ Y6 [9 [. \3 P0 I0 Kunsustainable 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
8 x% j0 ]) X: A/ W8 z6 \2 Pthat exceeded its fundamental-justified level by approximately
8 n2 R1 I7 K2 ?( j2 I. _0 Q5 q12%, an excess that was exaggerated in the past
7 C( @9 n5 I1 e% |three years.
. |' t( w$ s4 C9 g4 w" Y% [By “overpricing” we mean that prices detached from
2 c$ D% K- J% t2 n9 N2 |their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
% z' e* Y# d2 }8 }4 l: P: o  n4 cboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
. f; b/ S3 f( m' F* VWe consider “overbuilding” of two forms: “demanddriven”
3 a: Z$ P- W; G: ^where homebuyers buy up too many houses and
" p! a: i& Z# E! s$ ^5 Ithat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
& k* O  k0 W# A; A* \3 Sthere is evidence of both types, we contend that Canada’s
( l* w! J+ O: J1 u4 n6 `" u& h“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
/ _/ Q, L9 `" `$ v; ]: x8 EWhile most markets won’t face U.S.-style overhangs,
) I) S2 L0 g3 P2 L9 cthe 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
+ w. t8 i8 n+ j' o7 `% ^remain choppy and new residential construction will be
9 ]2 W0 w0 J& h$ z$ e* v( M' I, w* bdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
! t" O# s) ~6 ?* \% A4 qresidential 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
fundamentals 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
0 X/ b: e+ ~/ v/ n9 m& m  U  l3 ~# along-run. Since homebuilders build to meet demand, we
: b8 F" x! d/ l8 `0 @7 p. h7 q. Eregard housing prices and household formation as the drivers
of residential construction.
$ p& e* q; E! |7 _  fTo examine the degree of overbuilding, we employ a
4 ]. C3 v3 ], a$ E. c( ]7 \3 c" y“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
4 i5 j1 ^) J: p$ Y9 s+ Ifundamental-justified level by about 12%. Although new
: M5 |4 j2 Z* x  O  G; a$ F* E# vunits were being absorbed, homebuyers simply bought too
) S; @/ y' ]3 N+ E  mmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
  U' V/ H* g2 [) b+ ?population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
* F+ G3 Z- P5 zbuyers’ territory. Homebuilding in the Atlantic provinces
1 ?3 X7 B- B6 x; `8 G" Q) V( ~4 J' Qhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
8 q, z7 x$ p0 w, WQuébec shows signs of strain – especially given the
& s; L8 W9 u% C: T4 N7 ^( d/ {& v- nstrange accumulation of unabsorbed multiples on l’Île de
$ w( _; l0 n4 U0 C) Y* @+ [) u6 YMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
" X; M( |/ |. ^; C7 R0 Grates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
- T; z) ]3 S, K( Y, J2 O) e  _  D; P% Ucondo market. Both in Toronto and Vancouver, historically
8 K7 k6 v+ X& S8 Mhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
3 K. U2 z" [& c0 W- Areach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
3 U! Q6 e, e) I& o8 r& F: yresidential construction in B.C. will definitely droop, we
5 o0 Y% G  W% f. Y3 V* t( G; uanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
; q* n" E: A9 z) iwill alleviate some of the pressure from overbuilding.
1 L0 S- m; d8 f7 Z  h9 b! aOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
! ?7 R( v" k6 [4 f! w3 nGrant Bishop, Economist
& d5 ~! V' A1 @. @5 X4 X  D6 w416-982-8063
Pascal Gauthier, Economist
+ ^9 @8 z0 O, m0 t. D* h; `416-944-5730

0 E5 p- _/ J4 e; P/ V% ?7 A% ]http://www.td.com/economics/special/gb0409_housing_exec.pdf

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