TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
3 Y" W+ Q2 \7 v- o. Ufrom 2002 to 2008, unsustainable price increases drove
* N* c0 F" J; ]1 a. z& tunsustainable levels of building. Our view is that house
4 @" q+ e1 Z! R5 d$ G: J! nprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
9 t" \! K$ a! Z- D3 G" pthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
: R3 v+ R5 _$ ~5 e; Othree years.
! H/ [" I( G* S6 y, {1 p# yBy “overpricing” we mean that prices detached from
6 L/ o1 r* N( Z+ X+ w1 R: U2 Btheir fundamentals, as witnessed by a steep erosion of
$ I. `5 [3 G9 M, K# w# m+ g4 B0 waffordability. The current unwinding of house prices reflects
( f3 K# V0 V' ]both a cyclical downturn and a return of house prices
to fundamentally justified levels.
' R3 X* M9 d! S# o& g1 \+ ?. rWe consider “overbuilding” of two forms: “demanddriven”
6 \7 o+ m( d: Y. T& l( t3 _where homebuyers buy up too many houses and
0 y) b( ^  e0 E+ Vthat this demand cannot be sustained; and “supply-driven”
4 A1 ]& M/ G* awhere builders accumulate excessive inventories. Although
6 @1 ^* A6 e3 J5 E1 \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
0 ^6 h. T" {% w$ `$ V! Qthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
- n( Q+ l: C, ~; s- n$ G4 xfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
  i1 c  q' w3 }! T4 Edampened, owing to this structural weakness. Construction
0 {& f+ y; |& q/ a9 Z: Z: q  Yis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& p1 {: I4 a0 k+ X8 o7 b) ~- }1 A125,000 starts over 2009 with a trough around 115,000 units
- i, B9 r% e8 R3 ?7 ~1 G9 m# qin the fourth quarter.
) O# u" B7 p; Q# _" [7 YTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
' O3 L8 W, N' ^5 J; J7 E1 Ffundamentals of house prices and housing starts in each
, N# D3 F/ V: w& j+ B$ ~4 A- }province. Affordability is the key concept behind home
$ j% H4 q8 _) j9 F8 o0 v! X/ D- Qvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
$ ^. e: t5 z5 y# a4 |7 }+ oregard housing prices and household formation as the drivers
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
  S: \/ w8 `8 O0 q7 V  b$ \0 gfundamental-justified level by about 12%. Although new
6 A" J# _7 ^: Cunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
/ }3 }; L5 o+ Q; f& R6 zwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
( t+ }6 t% F4 _! X! B; X8 Svery time that the resale market has swung into strong
  x, \  D9 c& |: l" N7 c8 ebuyers’ territory. Homebuilding in the Atlantic provinces
7 L2 \! j: X0 x! M! qhas been relatively balanced but, while not plagued by structural
( K+ A# W0 C/ l' ]3 W: l1 Sweakness, will be singed by the downturn nonetheless.
! V# c8 W0 A. M8 E/ hQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
2 F- V' R5 W# y- V) G( x& ZMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
1 x, S, Z# I8 b  w; ^* Acyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
7 @3 ~# p* i/ q& U; Q0 W2 @condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
( a. S3 b$ `% xconstruction mean that record numbers of condos will
' N1 O5 i% ]9 q* e8 X/ [: Dreach completion during 2009. If absorption rates fall, as
8 S. u; ^( E( m: O( C" ]3 ]" Mcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
4 K7 ^7 c9 a9 t: h3 {  \residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
( g% H* \2 \- O1 t$ i% B( A8 minter-provincial and international migration over the coming
years, 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
416-982-8063
Pascal Gauthier, Economist
416-944-5730
7 ~$ p9 A+ _, J+ v
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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