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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
" w$ u2 \2 _: f1 ]; Cfrom 2002 to 2008, unsustainable price increases drove
+ D# q9 C2 |, r4 W1 `unsustainable levels of building. Our view is that house. ^7 j" N2 O/ W/ A- b
prices exceeded the value of housing that was justified by
+ R8 C- }: E! G5 J7 n, v3 K* o3 Efundamentals by approximately 9% nationwide. This* G# _2 h( l8 T# w% P5 k& Z
overpricing compelled a level of residential construction' C1 X$ V; e  {
that exceeded its fundamental-justified level by approximately
  m$ d$ g3 G/ V4 m7 P# C/ l$ v12%, an excess that was exaggerated in the past- X$ o. t2 ]+ S8 O5 b, ]4 k
three years.
4 R- s* ~# G; F2 mBy “overpricing” we mean that prices detached from
* h* L6 {6 g# D5 Ktheir fundamentals, as witnessed by a steep erosion of
. _; ]2 @$ l' E: h/ }& N) _9 U/ ^affordability. The current unwinding of house prices reflects
. ]# T4 a7 H$ z' R/ A$ M3 C* }both a cyclical downturn and a return of house prices
1 Y' M' X' h; [; Z, t' cto fundamentally justified levels.# |0 Z" z1 m! ^$ l- E
We consider “overbuilding” of two forms: “demanddriven”0 t: f8 P( P! R8 B* ?7 w
where homebuyers buy up too many houses and
: |/ ]# T/ l4 T  N2 e6 v* vthat this demand cannot be sustained; and “supply-driven”
4 ]7 @- y5 ?; H" Kwhere builders accumulate excessive inventories. Although
8 i/ k& b, H$ Uthere is evidence of both types, we contend that Canada’s
1 q( m4 n6 m& S' R“overbuilding” was mainly of the first type, where$ z- C7 }/ k; c! Y- Z2 U5 v7 d
homebuyers pushed homebuilding to an unsustainable pitch9 N) x) k! F  D6 q* ?. L
that is now being rapidly reined in.
9 V1 R0 S; e' B' m# iWhile most markets won’t face U.S.-style overhangs,
: x$ P4 p9 z0 P& ~the construction of too many new homes over the boom
+ D" U; M9 v$ i' R& ~! l( t0 bmeans a deepened slump. This overbuilding will likely weigh6 |% Q" E1 [7 R. Z
on markets over the next few years. Even as Canada recovers* z& D( x4 r" Y* `: H
from the cyclical downturn, house price growth will- @# Z& C1 b. ?) O$ o
remain choppy and new residential construction will be
# ]6 \  M: W$ ?dampened, owing to this structural weakness. Construction
. b* r% z7 J9 i! H4 B. I# Sis now undershooting fundamentals and we expect this7 T% a9 C# U* e5 u2 h
to persist over 2009 to 2011. We anticipate that nationwide" E4 p$ q, x' d+ M+ G' }
residential construction will fall further to around! Y" M- w; B8 l! z* P' W
125,000 starts over 2009 with a trough around 115,000 units3 C$ O' Z0 k0 |  u; {8 Z4 |
in the fourth quarter." r5 u( R" q/ i: B( C/ b
To quantify the degree of overpricing and overbuilding,
& Z3 ^* |4 r8 w$ D+ dwe first develop an empirical model, based on long-run, n4 V' G( Y5 t' V" N9 o
fundamentals of house prices and housing starts in each
4 B6 U2 m% v* \: [province. Affordability is the key concept behind home
1 V  f0 F6 m% @, C/ N8 \values since house prices should track incomes over the6 C/ E! L9 o6 }5 I1 i* S' r2 h
long-run. Since homebuilders build to meet demand, we
" B8 E: C  z7 F7 h2 O) N- Dregard housing prices and household formation as the drivers
" [7 {$ C+ W- ?7 Dof residential construction.
/ B( r  D" W" u& sTo examine the degree of overbuilding, we employ a
( ]8 v' Z/ X/ q6 q# {“counter-factual,” asking what level of residential construction
! u7 l7 G4 c! }6 ^' p+ mwould have occurred if housing had been priced
/ q; [* V( N! h) r: Joptimally. We find that actual homebuilding exceeded this/ R* Y( G8 O6 i
fundamental-justified level by about 12%. Although new4 M2 r) d* I7 v1 C5 _
units were being absorbed, homebuyers simply bought too- r3 G' m: X! |9 y3 w8 m3 N
many houses at prices that exceeded fundamentals.3 j: y0 @/ ]- i0 a' _/ ]
Regionally, we see the greatest strains on the Prairies,# v+ T8 D9 X2 _0 d  l; Z' f& k
where housing demand will further contract under waning6 O) a2 a( m7 ?9 C
population inflows. Saskatoon, Calgary and Edmonton are+ p, v7 j) k7 K3 n3 _
already witnessing surges in their unsold new homes at the
# y1 ^. h, E4 N) pvery time that the resale market has swung into strong
1 z- v+ e# G  Z: s2 Qbuyers’ territory. Homebuilding in the Atlantic provinces
9 O9 p6 V" \6 `7 {; ^, \$ ohas been relatively balanced but, while not plagued by structural5 g# I6 R% x5 x& G* R; w7 i
weakness, will be singed by the downturn nonetheless./ j, n% r% S4 Q: R
Québec shows signs of strain – especially given the1 s* ]6 ~  D6 W
strange accumulation of unabsorbed multiples on l’Île de
9 ?# o1 G$ g, T  E9 j* [5 r. `Montréal – but recent building has been relatively balanced,
/ U9 n6 ~1 H  [* rgiven the province’s history of under-building and low ownership
+ J% i+ b% J# P5 K4 u  R2 urates. While Ontario homebuilding will reel from a: b6 X; N% e+ E6 h
cyclical downturn, the degree of structural weakness appears# H* X) Y/ J7 A8 ^6 [
limited – with the important exception of the Toronto
; g0 l5 j0 C7 m+ j* F' \condo market. Both in Toronto and Vancouver, historically, l) E6 n: B5 A! p" l
high levels of apartment-style units presently under( h4 _5 M  t3 ?
construction mean that record numbers of condos will
6 a( c" G/ R$ V6 h/ ureach completion during 2009. If absorption rates fall, as$ H" K) m8 [- J: B" C3 r
cyclical factors would indicate, condo inventories could
& n, G4 S: y4 k* pspike severely – particularly in Vancouver. However, while
; S, f3 E) g: c" A! E. Qresidential construction in B.C. will definitely droop, we
' T+ C+ b6 J3 Z" P6 t4 w1 d1 K/ _anticipate that the West Coast will continue to benefit from( i7 P% {! h' Z# f- T
inter-provincial and international migration over the coming! m5 }* P4 L) w+ x
years, which, along with improvements in affordability,) I" r; [; ~. w, a; t
will alleviate some of the pressure from overbuilding.
) w7 h  ~6 P* ~1 Q3 X1 gOVERPRICED AND OVERBUILT: CANADIAN HOUSING# ^) V# |0 o4 L
MARKET RETURNS TO FUNDAMENTALS. B+ q3 U# h- m, c
Grant Bishop, Economist1 A( R: y( B* B$ Q  l
416-982-80636 p! z) {) S: \
Pascal Gauthier, Economist
# l  B  D3 D# {. c2 M( B( F416-944-57305 d" J( [5 F$ b$ I& y+ j
  p; u+ C$ p) F3 c! w* P
http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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