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
) y, j, {) b/ Uunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
( Y! ~; R  A* R& {" f6 T% Ioverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
2 [5 T. `+ g# o# d/ a  M4 Qthree years.
9 R, _& X8 v6 d2 mBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
1 s  K7 k7 f$ l- ]0 C# C7 Jaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
/ Y% B" V7 X, l2 K% ]) o; u8 jWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 L+ @  P* z7 e( Iwhere builders accumulate excessive inventories. Although
" c+ k: V/ _* ]. Y+ \- zthere is evidence of both types, we contend that Canada’s
  A5 |+ O4 {& m, L“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
) P5 X3 z2 c  m& \While most markets won’t face U.S.-style overhangs,
& c6 ~  f& l0 y+ Fthe construction of too many new homes over the boom
% O. ^5 x( m/ q3 T, m/ g- q( q1 zmeans 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
% L( F1 u5 K/ C6 s, t4 ~remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
8 S9 ?1 x4 u+ `2 x+ a: N; n+ ?is now undershooting fundamentals and we expect this
" }8 d$ p7 l7 U6 Eto persist over 2009 to 2011. We anticipate that nationwide
. B3 Y3 t# E2 X& G& \1 l6 Qresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
4 `; p7 w% h% v5 E7 _: W; ]! yin the fourth quarter.
. ]9 L. L8 K$ |; D; M0 qTo quantify the degree of overpricing and overbuilding,
7 a' m2 A! g: q% m: Y8 Awe first develop an empirical model, based on long-run
2 R" X# t' Z% J$ y4 _8 _3 m% Jfundamentals 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
regard housing prices and household formation as the drivers
2 _8 I1 E% R3 @- ~of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
, U, a8 [* a- V9 Y5 C8 ~optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
1 E" s6 l/ g  d: b1 B  Gmany houses at prices that exceeded fundamentals.
9 W6 o% j2 S& CRegionally, we see the greatest strains on the Prairies,
( m8 F0 B& ?2 }: i% X& G# _$ vwhere housing demand will further contract under waning
: e/ E2 @. j# cpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
; z  e8 C* c# O$ ]5 every time that the resale market has swung into strong
: A$ m+ h* [' U' z& s5 Z' Abuyers’ 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
strange 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
+ [8 c5 f* M  E" @! trates. While Ontario homebuilding will reel from a
0 y0 P8 {5 z6 h, tcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
$ T8 g) F& B5 M$ p! L! Tcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike 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
inter-provincial and international migration over the coming
( @. H1 s/ z5 D0 Dyears, which, along with improvements in affordability,
! w8 K3 E9 V' U- `+ ?: Twill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
$ `1 ~1 {/ T, B8 q- W% Q/ e4 t+ U7 hGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
0 t! Q5 F# T7 G# v: e  F: y# z416-944-5730
1 B9 |' t, d$ Z# u  D+ }1 }9 }
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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