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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
: ~3 n" H5 |2 Y( r/ n) X! S0 xfrom 2002 to 2008, unsustainable price increases drove
  {# i; R. o3 I2 ?  c) ?+ [/ a+ junsustainable levels of building. Our view is that house
$ I' H) V( v+ |+ x2 `7 uprices exceeded the value of housing that was justified by
8 A! O% z3 y, G( O6 M- J1 Mfundamentals by approximately 9% nationwide. This
( N- j5 E; q2 O9 B& d2 _overpricing compelled a level of residential construction
0 I4 p7 B- ?9 z7 K+ d  L' L  ~that exceeded its fundamental-justified level by approximately8 Z- [0 N' t/ O9 O8 C( D; X1 ?
12%, an excess that was exaggerated in the past
! S' S9 E$ t2 L1 q5 |three years.
& r: I# a5 A3 tBy “overpricing” we mean that prices detached from8 ~) I; w2 E7 W- z
their fundamentals, as witnessed by a steep erosion of& t* x- m1 j3 f. h  q" J
affordability. The current unwinding of house prices reflects
* y# q4 l9 a& w) T1 yboth a cyclical downturn and a return of house prices
: M8 U( s: m% t! T; [7 K0 cto fundamentally justified levels.0 k" K) O& [* `& p$ k9 F- P
We consider “overbuilding” of two forms: “demanddriven”
  y& n1 u5 M% Q8 K3 |where homebuyers buy up too many houses and
" d  l3 b! w+ p/ g' {8 rthat this demand cannot be sustained; and “supply-driven”
7 ]. Q# N# z% B- Y. L, qwhere builders accumulate excessive inventories. Although5 P, {5 S$ g& k5 x
there is evidence of both types, we contend that Canada’s
. D: r4 h( ~2 l“overbuilding” was mainly of the first type, where* l0 Y1 z) G# H8 a3 Q
homebuyers pushed homebuilding to an unsustainable pitch3 R7 v# K7 k. W1 B( ]. J! O
that is now being rapidly reined in.
" v" L* f+ \1 Y6 s9 xWhile most markets won’t face U.S.-style overhangs,
5 a) f6 q9 f+ t) B, l1 Uthe construction of too many new homes over the boom2 h( e$ j: y( S4 z
means a deepened slump. This overbuilding will likely weigh
" t2 ]% l( w, j! K- Kon markets over the next few years. Even as Canada recovers. S4 k0 G- X- o: x( K
from the cyclical downturn, house price growth will- C! L& Z- T9 r' s! c
remain choppy and new residential construction will be: l6 h9 M$ P. G9 u3 L* P! B% K
dampened, owing to this structural weakness. Construction
3 T1 p+ r- M) i8 X0 @$ C$ s0 Yis now undershooting fundamentals and we expect this
6 `* Z0 R2 L8 {; j' b$ Pto persist over 2009 to 2011. We anticipate that nationwide1 l0 C0 _/ E- m- w- Z3 ?' L5 ]
residential construction will fall further to around
. m- E9 u3 F( d! L- c# a125,000 starts over 2009 with a trough around 115,000 units
$ m; n  m  c4 d( }8 [) q4 U# j) E" tin the fourth quarter.$ B2 Q. b5 r5 {! t+ b$ X) x* T) `
To quantify the degree of overpricing and overbuilding,' E& y2 c6 V5 ?0 |, h$ D
we first develop an empirical model, based on long-run) d4 u0 l' g' g4 A; z, y
fundamentals of house prices and housing starts in each
* z, z8 r7 u: C# l- ~! Mprovince. Affordability is the key concept behind home
, G) e2 L6 P6 N* T+ d. Y/ W; |values since house prices should track incomes over the
8 o8 i9 ~' q( S2 Glong-run. Since homebuilders build to meet demand, we
& V; {4 U* g0 M! Z  D+ Kregard housing prices and household formation as the drivers9 m2 @9 u  n- I- y4 _! B1 o
of residential construction.+ i( K9 Z, N) ^8 B3 ]( ^$ b
To examine the degree of overbuilding, we employ a/ ^$ W! r: T( P& Z' R$ p3 R
“counter-factual,” asking what level of residential construction3 e2 @$ F) [! C) D! u
would have occurred if housing had been priced7 C# r, z# {, G; ?: {: p0 z8 R
optimally. We find that actual homebuilding exceeded this
4 n6 \" w  M+ D2 e# c$ b' \fundamental-justified level by about 12%. Although new
+ ^3 q* ]' C, W2 Zunits were being absorbed, homebuyers simply bought too
+ @& |1 S4 \+ g+ D  `0 umany houses at prices that exceeded fundamentals.
+ y+ j8 b0 j6 ~& x9 T: E" z5 X  p& k# CRegionally, we see the greatest strains on the Prairies,! i. c) b8 K( |; [2 f
where housing demand will further contract under waning
9 W! _2 T$ @6 T7 E8 apopulation inflows. Saskatoon, Calgary and Edmonton are9 F- D2 s9 v( f' z4 N
already witnessing surges in their unsold new homes at the6 j( y: H4 h9 s8 ^( S
very time that the resale market has swung into strong, @1 j7 c" B7 ?( ~. {5 u
buyers’ territory. Homebuilding in the Atlantic provinces
1 G8 P5 ~: E- E( X' l1 @$ Hhas been relatively balanced but, while not plagued by structural4 Y' J  f( o$ \; T5 C* e
weakness, will be singed by the downturn nonetheless.
- v- B6 f  S6 ]Québec shows signs of strain – especially given the
1 @, S7 @" p) g1 M$ `- @strange accumulation of unabsorbed multiples on l’Île de  B0 c$ @$ y( K0 y) e, W
Montréal – but recent building has been relatively balanced,; j& c8 ]" p9 i9 v; b
given the province’s history of under-building and low ownership
; g8 ]6 U/ I* K) C- A7 krates. While Ontario homebuilding will reel from a6 X" w$ w1 \6 v; u1 p/ [
cyclical downturn, the degree of structural weakness appears
7 Q& R$ {* L2 t; p6 Y. Alimited – with the important exception of the Toronto
+ I( l) ?2 V+ X. h2 icondo market. Both in Toronto and Vancouver, historically7 }* c$ i( i3 x0 |! h
high levels of apartment-style units presently under
4 Z3 R' g0 k+ w5 e8 }  ^construction mean that record numbers of condos will8 {2 x1 L% V4 b& F
reach completion during 2009. If absorption rates fall, as* j1 \3 _% R% R7 _& S8 y
cyclical factors would indicate, condo inventories could! w% G7 D1 _9 G6 H; |. g; M
spike severely – particularly in Vancouver. However, while
5 y# Y! w1 J9 S( u% B! l$ Yresidential construction in B.C. will definitely droop, we
" A( q4 J9 K  E6 Tanticipate that the West Coast will continue to benefit from
, {1 l; h; }- ]; Rinter-provincial and international migration over the coming
! I4 I1 Z) @) p8 W4 K9 R6 }% @7 ^% \years, which, along with improvements in affordability,
3 z& O$ `) n3 M& U6 X! \' @$ Uwill alleviate some of the pressure from overbuilding.
7 L2 U$ `1 M# q% P* dOVERPRICED AND OVERBUILT: CANADIAN HOUSING
& ?- I. P. B! C/ `MARKET RETURNS TO FUNDAMENTALS* z" ?6 L% F, L9 S0 c* b
Grant Bishop, Economist5 w1 |6 h6 `. b  T1 x
416-982-8063
6 E- r$ j8 Z9 k! I: M1 P) ~$ ePascal Gauthier, Economist
3 u; g. H# r" V" P- @416-944-5730
7 @9 h8 \: u- ^1 h6 R. x4 P5 N) h  J8 X
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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