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
7 D8 m5 A8 Z3 @unsustainable levels of building. Our view is that house
4 l3 Z: z8 I2 ^' x" }& Lprices exceeded the value of housing that was justified by
5 f7 D, ]4 J' X. o5 ^+ Z9 @. ^fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
8 x3 Q% F/ A4 R: L2 r1 @that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
7 n" m4 o, `, ~. c4 Htheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
: H! e. k! z! v& R4 Zto fundamentally justified levels.
) F( N% N" }& w& VWe consider “overbuilding” of two forms: “demanddriven”
2 U6 ?6 V7 I$ E" F' m$ {where homebuyers buy up too many houses and
. z. V- `7 J+ [, Y- Hthat this demand cannot be sustained; and “supply-driven”
' u8 C" y( ?' U# r. Swhere builders accumulate excessive inventories. Although
- I- n3 R& w3 t) qthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
$ }  M7 J$ m" F7 E$ g4 g% hhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 |# g; }2 o  E$ K, [While most markets won’t face U.S.-style overhangs,
* L- `5 ~: J3 m) g1 X* h" Fthe construction of too many new homes over the boom
' x# u  @* F4 r' K/ \means a deepened slump. This overbuilding will likely weigh
+ T% r6 d) j# n- l1 p8 {6 K  ~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
6 y: R' I; u+ [3 S! e4 \dampened, owing to this structural weakness. Construction
$ d" [/ s. f8 ^( cis now undershooting fundamentals and we expect this
9 u$ z& o9 t  B4 X) y" b% @* C) _to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& K$ r* r. F) Z* j% G' a125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
6 K! L: u3 k7 r% dwe first develop an empirical model, based on long-run
  D7 r  ^8 h( c3 ~$ |! l; m: [fundamentals of house prices and housing starts in each
province. 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
" f' W/ r% A, G) Y! W1 zregard housing prices and household formation as the drivers
6 t, {2 N/ D- v) _+ sof residential construction.
  |  b9 {) F1 i  J: i; i7 e* f! MTo examine the degree of overbuilding, we employ a
5 n3 E6 r, ~* x+ k, Q, |/ M( [2 _3 h“counter-factual,” asking what level of residential construction
: S0 e, t$ A$ Owould 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
+ a) V. `5 ~/ a' F& Rmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
& V8 |5 {4 L: M+ s4 M0 V, I# Y' f/ Wpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
! w1 O2 H* t. f1 i- _very time that the resale market has swung into strong
7 p1 R& m; y6 F, |$ }( Vbuyers’ 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
3 s6 M5 F. S7 D9 j- p- J/ x9 Z8 S0 ostrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
  i' A$ G; k' I$ _: W' n7 H( M, xgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
/ O1 \8 V8 l4 l( ocyclical downturn, the degree of structural weakness appears
8 Q$ r7 I' `. h+ Q/ v. j' }6 Glimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
7 T. E$ o% W- {+ lreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
+ ~; n$ U/ p6 x/ [: t0 {3 g5 Gspike severely – particularly in Vancouver. However, while
, ]0 r* `% d1 p( P; V) m: f+ _) aresidential construction in B.C. will definitely droop, we
& Q# B1 o- S; B, b( D* v5 K) vanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
% W4 [# ]+ Y1 v4 Q1 C+ G0 x0 s8 eyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
2 J+ i0 L8 t+ H; f- G5 i  eOVERPRICED AND OVERBUILT: CANADIAN HOUSING
2 r# I# R) R6 [' aMARKET RETURNS TO FUNDAMENTALS
" Q8 t$ z  S4 S& O1 T4 @0 `6 z7 WGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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