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
) _( z3 N. c/ bunsustainable levels of building. Our view is that house
5 G5 y$ \$ U9 z. R8 j7 v& oprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
. k, v" |+ `" z/ koverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
. B: m8 \, n; G6 KBy “overpricing” we mean that prices detached from
2 O( C% H) P1 D6 t0 ?1 o( ftheir 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
: _* N: ~' R. F1 t1 ~" sto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
6 l" L" n  m+ Z4 tthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
; t, T" b6 g& O# U$ D$ r2 o" W“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
5 E* \" P# a0 {0 H$ ^While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
0 s+ Y* F2 ~; W1 K; k; f# Gmeans 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
  C; X! Y  \& J/ ^) S; I( bremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
; J# @3 p3 S- `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
" ?2 d) t* X% W- C# O3 gin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
+ n* m- \: d4 t9 Vprovince. Affordability is the key concept behind home
3 w3 g) \5 M* Dvalues since house prices should track incomes over the
7 ~8 |% Q! I# u* Qlong-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
9 I* l  \! u6 D; m3 u“counter-factual,” asking what level of residential construction
# j" H% Y( f. q( f8 zwould have occurred if housing had been priced
) U0 \/ `5 A0 I3 `( y' W& goptimally. We find that actual homebuilding exceeded this
# l4 r1 T( H% y/ @5 P) R# u/ F0 ]fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
, T+ }7 D$ q0 n+ Z7 z) G- tRegionally, we see the greatest strains on the Prairies,
' q$ p4 g( D3 k: t4 t3 n9 Q9 Qwhere housing demand will further contract under waning
! ^  D! h3 A+ ^, C% dpopulation inflows. Saskatoon, Calgary and Edmonton are
% `& x2 y2 Y9 v8 d: A0 Kalready witnessing surges in their unsold new homes at the
/ _$ ^" C$ O* e" P8 p; t+ y! Lvery time that the resale market has swung into strong
. b& t1 n& y; X, v$ d1 Tbuyers’ territory. Homebuilding in the Atlantic provinces
( n% y$ a8 D$ D* }0 a- khas been relatively balanced but, while not plagued by structural
; e. q- D, g8 y; w% ]. ^weakness, will be singed by the downturn nonetheless.
( T5 j* s' S; b- u8 I- E% o% yQuébec 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
, g9 ~5 i2 i  w8 J2 b- }8 x( hrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – 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
* ], w% h2 G8 B5 B' N  ^reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
+ }, i" L, L/ e+ R3 l0 @residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
4 u& r7 _, W; Cinter-provincial and international migration over the coming
, s6 h  O" N6 n8 A1 Jyears, which, along with improvements in affordability,
4 T  g$ F" t$ c0 Gwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
4 `2 W  C, T" c4 s9 o) t& B3 D416-944-5730
0 \3 o" ~+ X8 @% C
) z/ ^- L+ ]( O6 x& qhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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