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
# x9 h% p  O' N: l0 |unsustainable levels of building. Our view is that house
6 `' n4 h. a/ d9 x/ w! hprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
* m' P* ]- N9 g. ^- I9 Uoverpricing 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.
2 u  V* [6 Q  W/ L5 g. ABy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
. o# ?/ ]( S" {- [( Naffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
7 y8 v  f2 D' g* iwhere homebuyers buy up too many houses and
1 C! @( a( @# D+ |# U- e) s  W0 Ithat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
1 K) T: `/ h6 z' m* Uthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
5 d2 r- B3 V) X0 ]* i4 z% r6 f% Gthat is now being rapidly reined in.
  N( s0 r2 a% T5 K2 H0 kWhile most markets won’t face U.S.-style overhangs,
) t2 u& [( j* V$ Zthe 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
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
6 X7 O0 w; P3 Pto persist over 2009 to 2011. We anticipate that nationwide
- X& V9 V" [, y+ z7 B$ r* nresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
1 z# R" A* i. K+ X0 N6 J, iTo quantify the degree of overpricing and overbuilding,
' z' L2 w' W8 i5 u( }0 Ywe first develop an empirical model, based on long-run
. v/ v/ \  e2 mfundamentals of house prices and housing starts in each
& B1 F8 f+ ^6 p9 U) qprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
2 \/ c0 R4 y  i% [long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
  C: K0 C) p, ~9 n5 v, z% ~9 ^of residential construction.
To examine the degree of overbuilding, we employ a
3 K, ~3 G2 G: w5 S9 ]% Y8 L* F“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
" }+ ~7 n  J( n+ ]( L& _units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
, `7 S! n  t+ a/ h3 jpopulation inflows. Saskatoon, Calgary and Edmonton are
# G* S' ^* `1 n7 q& o( ]already witnessing surges in their unsold new homes at the
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.
Québec shows signs of strain – especially given the
. M. v2 J; f( Mstrange 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
% U' h$ M% {2 I4 r$ Trates. While Ontario homebuilding will reel from a
. G* l6 N8 D# b, lcyclical downturn, the degree of structural weakness appears
. \. W) s7 t3 ^; D4 llimited – with the important exception of the Toronto
4 j9 z7 J% ~  n9 a( tcondo market. Both in Toronto and Vancouver, historically
& x) }0 `; B# S4 T9 b, _; Ghigh levels of apartment-style units presently under
$ w: L5 a. g& uconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
! @! B. {6 F7 ^' d! T  dspike 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
- f2 D7 P3 v% d1 R, e' Ninter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
  w" ~. c  q! WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
/ R  H1 Z8 z& ?: ~8 rGrant Bishop, Economist
416-982-8063
% B) ^4 s# w1 s. |" S  hPascal Gauthier, Economist
416-944-5730
+ t& H1 Y, y- I9 p
8 d" Y! l' h0 ^5 i" Lhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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