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
! Q; Q& v! w, `( {. cunsustainable levels of building. Our view is that house
  T* g- O+ }$ I; w0 nprices exceeded the value of housing that was justified by
) q- w# P4 T" B5 \# I' \fundamentals by approximately 9% nationwide. This
' U. [3 I( `* d9 |  C2 s# Z4 I* X) {4 e0 ?overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
2 Z5 C& M( v0 O! f* N/ t1 z0 m7 _12%, an excess that was exaggerated in the past
2 ?, K/ ]6 z3 m2 Uthree years.
2 v3 r4 w# w2 NBy “overpricing” we mean that prices detached from
their 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
9 [* A& N1 w. w- }& q: M0 r0 kto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
# b: K  m1 }$ x/ P1 Nwhere homebuyers buy up too many houses and
, d' s- y9 A  ^: o/ f* g8 h' o" c& ithat this demand cannot be sustained; and “supply-driven”
# D2 h1 z' C6 F" s* I2 dwhere builders accumulate excessive inventories. Although
+ }- J) x9 X' K( n0 K- ^there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
2 U: m" U- a7 i5 L# ~5 Q7 ~. hhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
. ~" h) G( @! y! t1 j5 kWhile most markets won’t face U.S.-style overhangs,
8 a. ?! ]9 Z; G( Zthe construction of too many new homes over the boom
6 `% ^! B5 P5 J4 f# \3 h) i2 xmeans 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
9 x- D) A7 T" Eremain choppy and new residential construction will be
+ x0 @$ A* L+ L9 T. pdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
0 ^+ k, X7 ]7 [. e1 d! ~5 Win the fourth quarter.
To quantify the degree of overpricing and overbuilding,
7 d$ |& M1 R7 x9 t) kwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
2 C9 F. i0 T1 L& F& Tprovince. 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
% w, \. G6 i+ u3 H+ l+ T8 [“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
& h: H- L! A  A$ J2 Hoptimally. 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.
* ]& Y& r1 l& H5 G7 z2 L9 gRegionally, we see the greatest strains on the Prairies,
; {; U# o% \2 f) m' x% ywhere housing demand will further contract under waning
' Z6 [$ O1 P6 d+ }0 ^( [population inflows. Saskatoon, Calgary and Edmonton are
- E6 n$ T, E5 c! Talready witnessing surges in their unsold new homes at the
; e* c0 n4 e( e+ Svery time that the resale market has swung into strong
! t: ?  O8 p' tbuyers’ territory. Homebuilding in the Atlantic provinces
* y) q8 [: K; \% {has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
; n" @  [  P3 [! F; rQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
% c) k+ D8 _7 @6 i! R8 o* zMontréal – but recent building has been relatively balanced,
  V5 U& L% C+ k7 Q$ c8 }0 q4 Zgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
6 q1 i$ E; H2 |3 U/ T5 Jlimited – with the important exception of the Toronto
+ N# \5 G3 Z: y$ ~5 @7 o' Hcondo market. Both in Toronto and Vancouver, historically
: M$ A) P0 e4 M8 Y, r  E) L& phigh levels of apartment-style units presently under
construction mean that record numbers of condos will
& \7 Z6 \8 y: g) w# G  P! oreach completion during 2009. If absorption rates fall, as
8 ]1 `) W9 t' p5 ucyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
6 @( H% g% L5 V5 uanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
# K& |' [+ H1 w: C4 K6 I. kyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
2 I) S" M: r8 ]4 O) ]" |, O' F416-982-8063
Pascal Gauthier, Economist
5 B" u* I8 f( t4 }416-944-5730
4 |& T" S1 Z- I( D! I0 F
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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