TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
+ Q4 j' j3 r" p" gfrom 2002 to 2008, unsustainable price increases drove
$ k0 j" }) R# a+ a$ j" i8 runsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
" [. r" X! l* ethat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
$ F4 S" g, O' TBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
* j! C% O! J3 r% Gaffordability. The current unwinding of house prices reflects
1 |: V- J7 N3 h4 h( i+ ^7 f0 eboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
9 }, o/ n  ?& }# g0 jWe consider “overbuilding” of two forms: “demanddriven”
" y9 p; y) j& I3 H! Qwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
* f+ V" q. @$ O- Cthere is evidence of both types, we contend that Canada’s
& A, K; P" c& }; W7 k“overbuilding” was mainly of the first type, where
  Q3 a& F0 V% J! n! \homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
: y1 G) {2 E- L% K, z7 y7 dthe construction of too many new homes over the boom
; ^. y/ o  s* G+ `6 W8 \means a deepened slump. This overbuilding will likely weigh
& ]! Y6 Y1 {# ~) @on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
' G$ q- o' ~/ b! J* N# Lremain choppy and new residential construction will be
7 P; a$ ~" W9 S( }" L# u" ]dampened, owing to this structural weakness. Construction
9 }. s; u+ Y) v+ x# a' Sis now undershooting fundamentals and we expect this
+ d2 |2 s5 M' H& Hto 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
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
: d# J) R$ o! ]! B' N7 Vwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
  _5 Y, h! r/ b3 svalues 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
0 d4 Q0 S$ a6 d/ A$ E* N* ^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
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
# z- F- E' G# H/ d$ O/ {units were being absorbed, homebuyers simply bought too
8 g& Z5 G4 H% k0 a  p" Jmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
, k3 j( A0 @7 k+ [where housing demand will further contract under waning
$ f: @5 @; W$ K& Tpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
, H* o/ }. J- v- A5 w2 C$ Yvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
2 a4 y4 l' e7 D& _, khas 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
  j' r* i1 I. d8 Q4 X: r7 astrange accumulation of unabsorbed multiples on l’Île de
& l8 d6 N* ]  b* Q- @; }' \Montréal – but recent building has been relatively balanced,
2 A: k0 a2 Y- T) ~$ B% i& Q2 U5 kgiven the province’s history of under-building and low ownership
6 N2 E" K. N4 R2 C$ H1 Z" U2 trates. While Ontario homebuilding will reel from a
. x/ ]. T) H, g" ccyclical downturn, the degree of structural weakness appears
7 z: `' W4 J# w" x2 K4 u& f: ulimited – with the important exception of the Toronto
6 D* \# I: Z- Y1 Rcondo market. Both in Toronto and Vancouver, historically
& r6 f# u- j& c: ]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
0 M2 G+ S5 p2 |7 k9 t- t; jcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
. z9 m0 m" I2 Gresidential 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
& M$ d( }' ?, H7 g8 l+ }1 s2 syears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
- b# s# P& G+ eOVERPRICED AND OVERBUILT: CANADIAN HOUSING
* A; s& e6 o% K. J- ZMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
: V8 t  c  B/ G7 ?% b
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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