TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- s  U; N" r: K& rfrom 2002 to 2008, unsustainable price increases drove
5 K: S% H8 W. O+ ?unsustainable levels of building. Our view is that house
1 K, b+ M. t- K( O) E" o, f  x( wprices exceeded the value of housing that was justified by
9 }: L1 }$ Q5 r5 a; U/ h4 l0 \0 J) Zfundamentals by approximately 9% nationwide. This
0 _) t$ `1 E* B1 I/ joverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
3 Y+ H7 O* p6 D' W% d! s* b12%, an excess that was exaggerated in the past
5 g1 T  S& C6 n0 S$ ithree years.
6 Y, q- `/ J9 ]3 [8 [( IBy “overpricing” we mean that prices detached from
! L) w2 y# g6 w. K3 C' o0 }1 L, _their fundamentals, as witnessed by a steep erosion of
" j. e1 E, Y: F* m/ J1 e5 \) W" yaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
3 I7 z1 t' Y( N* n8 A; `where homebuyers buy up too many houses and
3 _) {$ U. h; t+ }0 N$ @: w( Cthat this demand cannot be sustained; and “supply-driven”
: S' K; C; C" k( z: H) t( f% bwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
( i  e. {4 O: [+ _9 C6 |“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,
the construction of too many new homes over the boom
9 r% U" A; z) S; L" v+ R7 _0 \) Fmeans 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
+ b  D7 H: S9 I" c" i  mremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
# j8 k! ?+ \- m6 p8 P, Tis now undershooting fundamentals and we expect this
% v2 S/ D4 g% l, W# A% mto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
/ U0 G; z# `. J; \& \: J125,000 starts over 2009 with a trough around 115,000 units
" B; A. s5 h" W# gin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
  ^, q7 N8 e6 s! E7 K0 dfundamentals 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
/ f: e; ~" T# O! ilong-run. Since homebuilders build to meet demand, we
* j# A- d/ s, s& m9 C7 Uregard housing prices and household formation as the drivers
  Z% {# z* O2 ^/ D7 b: w# Sof residential construction.
To examine the degree of overbuilding, we employ a
& r( u' v4 A6 o" S' Z% J“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
3 l- k+ }( t# K6 I$ L) Z* @+ r$ o9 Xoptimally. We find that actual homebuilding exceeded this
: x% ^* M. b1 Y  m; O# Y' ~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,
% |/ q2 L" \* u) h0 hwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
8 _5 e' d* S/ Kalready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
1 L1 Y/ b$ |% E0 whas been relatively balanced but, while not plagued by structural
- l. Q2 H0 w6 T, D5 V& m9 b9 `- xweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
' f4 ]( w, ~) e# y# V$ ^' wMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
/ C5 T2 D% [. Srates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
, n& y4 T. [5 k' O0 Climited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
/ ^) u6 z( I0 T! lhigh levels of apartment-style units presently under
1 B  m: s4 r3 J. d/ Y2 f( `6 bconstruction mean that record numbers of condos will
4 `1 g+ U4 Q8 V! E* W# ]' ireach completion during 2009. If absorption rates fall, as
5 [/ Q/ H/ z4 z! [( Ecyclical factors would indicate, condo inventories could
  O/ G# m% C% Xspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
- |3 k" p. ]. Eanticipate that the West Coast will continue to benefit from
8 q7 {, l  [/ g! ~inter-provincial and international migration over the coming
" v2 v/ t# y4 h$ v% B/ Qyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
; C/ @. G# f% v- AOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! r  {; J; r9 y( ?  p( I- QMARKET RETURNS TO FUNDAMENTALS
  x4 I7 u, t' O6 F+ T; r  DGrant Bishop, Economist
8 T' i9 _6 k/ W/ y/ ~  I' f! a4 r416-982-8063
8 m4 k( ~: T8 O8 }- Y3 A& ?9 zPascal Gauthier, Economist
416-944-5730
3 ~% O) `% W! Y, {1 g
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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