TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
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
1 r' X8 x2 D1 `( T; soverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
3 D2 U% [* ]1 ?12%, an excess that was exaggerated in the past
6 ?3 p2 o, ?# i+ j- W8 fthree years.
' q" a2 H9 _0 ?+ `5 ]6 |; {By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
4 g6 k- r5 b2 @, d8 a5 N* nboth a cyclical downturn and a return of house prices
8 @, q8 z+ l, K0 i, u  a0 _to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
5 d" Q6 Q. e. Z' tthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
3 n3 n" g/ x: u1 v# Q$ V" dthere is evidence of both types, we contend that Canada’s
2 p" Z8 I% f; m5 h/ S+ l“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
$ Y8 _" H6 |8 P- n$ J  ^) gthat is now being rapidly reined in.
/ s  F3 l. S2 x$ {# wWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
* N. }& n1 o; P# }3 Z4 rmeans 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
' ~: K8 E# n# t$ y9 s4 \remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
4 Y1 \" g) t) v% F2 V! v1 cin the fourth quarter.
$ u- {* ^4 T4 S) p. W1 C4 J% ]; iTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
) L$ o, q5 Z2 z+ {6 Y. R) A( e" Vfundamentals of house prices and housing starts in each
8 S( k/ Z. t8 R$ T5 ?" J% M; mprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
" h/ T5 Z1 Q6 Q* @7 ~long-run. Since homebuilders build to meet demand, we
' o4 Z) U0 T/ D( H" Vregard housing prices and household formation as the drivers
of residential construction.
# b0 l# I, f' c( w, H: {To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
+ ^- ]4 R  l9 t; e8 Hwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
0 d5 u4 t. |8 jfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
. V& p+ X7 H+ V% c0 W  O4 Hmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
2 i! m& c: y, N* s9 e6 iwhere housing demand will further contract under waning
  h" t0 b" n% \2 }, L+ P9 |! tpopulation 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
6 B9 u* Y+ w, H8 N7 mbuyers’ territory. Homebuilding in the Atlantic provinces
. J: P' m& v, G% Z- Ohas been relatively balanced but, while not plagued by structural
/ W) Z! D  A: @2 w# cweakness, will be singed by the downturn nonetheless.
* h; r% U4 {1 r/ N! |1 DQuébec shows signs of strain – especially given the
- K. d7 Z7 H) pstrange 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
/ f1 Z- H4 n7 X7 ~' _  @% Drates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
, H4 r% [* l( X, u2 llimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
9 h2 D& o$ F6 Q/ `9 j8 [high levels of apartment-style units presently under
6 e. S" a  n5 R. I9 q, Dconstruction mean that record numbers of condos will
# V0 L/ l! E" creach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
7 C8 P, F- }. X) winter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
# h& T; }* G& c+ p! [MARKET RETURNS TO FUNDAMENTALS
# _/ d( w* x7 F  rGrant Bishop, Economist
6 \1 S" `) c" E8 S2 B9 `" D+ i416-982-8063
9 h/ a  [0 \9 Y) ~; \/ [/ _$ pPascal Gauthier, Economist
* Z" L8 ?, X! h416-944-5730

4 h* B0 @, w7 `- `$ `) i/ @http://www.td.com/economics/special/gb0409_housing_exec.pdf

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