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
unsustainable levels of building. Our view is that house
& z5 X  e$ g9 i6 o4 fprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
* K6 S4 u' n4 I8 Z  uoverpricing 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.
; l6 m6 _% y. Q, t5 Z+ wBy “overpricing” we mean that prices detached from
% _$ U! Y& O8 A! q1 xtheir 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
to fundamentally justified levels.
: `* [- A" \# u8 m5 N0 oWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that 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
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
* A4 v! ~. n/ i% m: w0 ^that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
  v0 c4 U9 ?: y5 z9 N# d3 p5 P( Ethe construction of too many new homes over the boom
! Z& |1 f! a" \' I* y+ v% O" 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
- v% c3 Y. w6 X  J. w1 `remain choppy and new residential construction will be
" r: d4 p4 P$ V" Jdampened, owing to this structural weakness. Construction
3 T  a8 \2 N8 W, Uis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
4 o1 Z) w, c" G- Bresidential construction will fall further to around
. A. ?) |6 ~* W125,000 starts over 2009 with a trough around 115,000 units
$ E2 u0 `# K! m3 Q+ {) G9 rin 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
7 ~9 E) ]2 Z0 r9 ~6 b; ?& |province. Affordability is the key concept behind home
, z7 Z/ H/ s3 I* s* B) qvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
) N9 Q( k" H" H4 P# z9 B! [regard housing prices and household formation as the drivers
! Y- B7 Y" C5 ^- g% ?6 K4 zof residential construction.
$ K& f6 W9 z: J6 eTo examine the degree of overbuilding, we employ a
" M; E9 O" S- M/ u2 \“counter-factual,” asking what level of residential construction
. C! a- N2 f0 a) D. ^4 p( kwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
- u% P6 p+ A9 i7 ffundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
2 @+ c% d# B  [, _3 P, F! j, @Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
. m$ A% F8 k% r$ s* Balready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
0 m6 G0 q3 H- l2 }buyers’ territory. Homebuilding in the Atlantic provinces
+ B! a5 h1 F% m: M; e! _& P: E  X, Vhas been relatively balanced but, while not plagued by structural
7 ]" x/ B1 d1 {/ d) _; ]weakness, will be singed by the downturn nonetheless.
0 ~5 o4 R2 L  n" V; V+ Z' A; tQuébec shows signs of strain – especially given the
& t# e" L% I) ?5 \strange accumulation of unabsorbed multiples on l’Île de
5 O: [3 U5 N2 V  {/ oMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
& k; Y& w$ i! @4 K, l+ e3 [) srates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
/ H) t% u) E/ ]4 M3 f/ j  g. Gcondo market. Both in Toronto and Vancouver, historically
0 h5 o8 s8 S  n6 k; a3 {  Fhigh levels of apartment-style units presently under
% B+ K, b. B0 a1 a3 g7 N% Q. mconstruction mean that record numbers of condos will
/ j* Y! f/ h+ P6 Z3 f4 Ireach 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
8 \/ q6 b' v$ ~+ H- pinter-provincial and international migration over the coming
# q. h8 ?+ j; B: X7 G+ p% R# Lyears, which, along with improvements in affordability,
5 X, a2 D) x) r7 t. {7 pwill alleviate some of the pressure from overbuilding.
/ y. V7 `; F# X0 f% ^OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
0 X+ |# _  E- fGrant Bishop, Economist
9 y. ~# T# l/ Z# q2 R6 B# e416-982-8063
- ^# `$ x- j, Y0 {- |/ P- FPascal Gauthier, Economist
; o; O9 B- G0 k; f, W/ a416-944-5730
4 u! R: t  L# ^9 I
  f' p  Y) b7 U3 ^/ C  fhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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