TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
. J" o4 t& B0 Y5 j+ [! pfrom 2002 to 2008, unsustainable price increases drove
+ ^4 \: G5 o  X0 k6 o7 H& D: l& [unsustainable levels of building. Our view is that house
( v6 H' Q' [( `# |prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
7 b4 j5 @" D' D  V/ P' Joverpricing 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.
5 B% E6 ^: B( {/ f5 |  HBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
. _+ |, \" U9 O: M: Laffordability. The current unwinding of house prices reflects
& z. d- I' w  S7 a. {1 D$ y8 Gboth a cyclical downturn and a return of house prices
( |5 q+ N& g1 ?to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
7 F" @: I( `4 Hwhere homebuyers buy up too many houses and
that 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
! W4 Z5 x2 O! r6 t  r: b6 r“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
4 W# [& F: H8 i" O. g! U$ O" Sthat is now being rapidly reined in.
) e7 L; ]4 b6 {# R( j7 uWhile most markets won’t face U.S.-style overhangs,
1 }7 v! W- G& r3 ythe construction of too many new homes over the boom
) m% m9 [9 K7 ^, imeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
7 G" W9 v( g: C2 a5 Afrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
( Y& M& t$ K0 {6 f8 [( hdampened, owing to this structural weakness. Construction
& l; g2 q. @2 a+ fis now undershooting fundamentals and we expect this
' B2 a+ o, [+ N! O0 t7 ato persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& {* t5 X' [: i8 L/ c4 B) n2 _2 x! y125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
. b/ W/ j8 m6 z& @! Z* X, pwe first develop an empirical model, based on long-run
7 g+ u/ U4 v; H! V8 _+ {! u8 vfundamentals of house prices and housing starts in each
. h8 Z0 m6 i/ y$ u4 g8 w' P( eprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
& b5 D( }2 c5 [6 Q+ Y" Dwould 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
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
. J- I- s% B' A, G+ xwhere housing demand will further contract under waning
* c- A( \7 t3 \0 O* O- L1 apopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
; V/ t2 f7 m- M, D$ H: ^3 ]8 Hvery time that the resale market has swung into strong
: T: \5 }3 W4 H* Ebuyers’ territory. Homebuilding in the Atlantic provinces
2 O4 p! ^( X8 }, G- uhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
/ m; T+ w' M/ ^* T' g; NQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
0 [: r! v5 c% K0 [( n2 l/ U% Egiven the province’s history of under-building and low ownership
0 `" c% S+ m6 s0 c  L+ |- i3 E/ }' F' hrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
8 _, Z: z5 H5 w# Y8 K/ {condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
6 B( O2 ~5 v0 r2 Rreach completion during 2009. If absorption rates fall, as
6 L8 e4 j$ ^! ^4 ~cyclical factors would indicate, condo inventories could
/ E! E/ i: P0 k! _2 S9 I) e5 Aspike severely – particularly in Vancouver. However, while
- K  m! ~% ]1 Q5 X) _+ j) q' }residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
( L& Z3 ]- \* zOVERPRICED AND OVERBUILT: CANADIAN HOUSING
. b: X+ \: l  P0 r9 uMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
: P! J- `$ x4 J  ~& q; S1 n416-982-8063
/ @9 S. e  b$ I5 Y3 k  vPascal Gauthier, Economist
; U: y# d% I; W; V# O416-944-5730
5 s3 l; b5 R/ ]& v9 s7 p- ?
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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