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
7 @# a$ k; U6 c9 P# ^/ Y- x7 kunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
. G( ]. V* U: N3 J  M8 _fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
7 d$ e' y4 T5 b- Z6 pthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
+ K4 l) `6 w# Q/ g: RBy “overpricing” we mean that prices detached from
/ D: s  I' d  M3 G# ltheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
, j# h' h3 ^, Z8 `9 Kboth a cyclical downturn and a return of house prices
' N9 e5 y6 |* q6 Q. Yto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
- J* N' R+ g5 S; q' xwhere homebuyers buy up too many houses and
4 ^1 K! L, ]" j3 V& {  _- tthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
% d1 ~. k4 l5 X9 V. @! y  hthere is evidence of both types, we contend that Canada’s
! n* d8 j  Z; U1 y9 n% b% [" m“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
$ c. l+ o4 Z5 o3 z* p, t- zthe 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
  ^; O# U7 Z  X3 m4 _- f, `* G$ ffrom the cyclical downturn, house price growth will
8 _/ \. u4 Z/ Z1 }0 l( D1 aremain choppy and new residential construction will be
6 D0 k8 @3 q6 P& N$ R1 hdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
5 G4 D2 J2 y2 w1 B! k: Q& k% x2 L125,000 starts over 2009 with a trough around 115,000 units
" J' N' G% o$ q# s/ M" uin 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
province. Affordability is the key concept behind home
values since house prices should track incomes over the
) e5 ~. _1 w: e& }0 r& glong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
( L; C; U0 C. B3 N3 i" T: s  u7 Z0 Nof residential construction.
  u3 W2 `6 ~( P# B& l! V/ L( nTo examine the degree of overbuilding, we employ a
% a- i. L% P& \3 N, @2 v8 D“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
) @% D8 ]8 |5 G8 [0 S) ~$ ]optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
4 q, P1 h( r# W  t4 X7 kwhere housing demand will further contract under waning
0 ?4 w3 ?. K  x2 o  U) {+ z, {population inflows. Saskatoon, Calgary and Edmonton are
( S6 @4 H/ Z" o" S$ k$ Q3 p. f; falready witnessing surges in their unsold new homes at the
4 g: c% O* `  c. gvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
9 A; }3 q! y0 ~( `has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
( R! o- I$ C& u3 n- w8 e1 AQuébec shows signs of strain – especially given the
* e* O  L% K( j6 p$ ]strange accumulation of unabsorbed multiples on l’Île de
5 C3 H- |( q; t# V) x. `- vMontréal – but recent building has been relatively balanced,
* K5 h9 y) W/ t5 Bgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
2 Z2 s( F' Q; y9 m# e" jlimited – with the important exception of the Toronto
; A+ O1 }& }% i+ e7 Z# Econdo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
5 V! |$ y9 I% N2 jconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
+ p( W9 C5 X; r- A, ^- m, L$ Fcyclical factors would indicate, condo inventories could
- j8 t" P5 \( X6 z( Xspike 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
years, which, along with improvements in affordability,
$ n! U; t% `& @+ U2 E, C7 ]will alleviate some of the pressure from overbuilding.
4 w, {/ A/ C# C6 rOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
" X- E8 k/ b2 d% _- g* Z# jPascal Gauthier, Economist
416-944-5730
) {2 l7 G- j- V% q
( d1 B6 n- E" ~9 B& g4 zhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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