TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) y% w$ Y( A% q$ S% O* kfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
- a- R) S& R+ d; v7 m; gprices exceeded the value of housing that was justified by
+ c# Y  @" g1 w# _0 v+ @fundamentals by approximately 9% nationwide. This
- @+ P* p1 V3 A! r( Woverpricing compelled a level of residential construction
6 \! d! u7 j7 f' Ethat exceeded its fundamental-justified level by approximately
1 n" W0 K: X! J! Y2 D% u  M+ `12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
( ~  a3 u( i- x2 Btheir fundamentals, as witnessed by a steep erosion of
0 \: S& I( E! C; |" h# J0 daffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
8 j6 {; g0 S  `  Y' ]+ gto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
: k1 U; n$ [. l7 y1 ]where homebuyers buy up too many houses and
0 K  x% m3 Z, j! i, A2 ~6 U, R9 J6 Jthat 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
9 Q" Z" U: b5 \8 a* ~( M“overbuilding” was mainly of the first type, where
5 @0 r+ e0 b) \) n* v+ qhomebuyers pushed homebuilding to an unsustainable pitch
1 k. l* K4 e# N$ m% \  N: w" Q3 X8 ?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
$ g  M5 b" U0 @+ p, I+ e0 j, emeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
: g1 W- s+ K, L. [: m. ]  ffrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
/ n/ N. t4 J+ D: {  u- sis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
; T3 S" e) `) d1 w' V1 ~6 g8 ~9 Uresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
3 p8 ?, V, ~# S2 R+ Vin 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
9 w: f2 P% j2 ]9 oprovince. Affordability is the key concept behind home
4 a7 B, b. I2 e/ \3 Q( }values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
7 r7 L. S; E0 x1 iregard housing prices and household formation as the drivers
: G  H+ v; f6 v* U. iof residential construction.
To examine the degree of overbuilding, we employ a
) b" ^* q2 T7 P; \% s“counter-factual,” asking what level of residential construction
5 S7 N& P! [2 O5 ?" m) I! Nwould have occurred if housing had been priced
5 T3 C, j5 G. I$ |1 Ooptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
0 `2 ^3 d4 o4 w" C4 cunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
, N8 Q) \/ C# B6 K. iRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already 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
2 w$ M2 H: y! r0 w8 O* Y+ U2 Yhas been relatively balanced but, while not plagued by structural
  p; E7 q. k! u4 O& a3 F! {8 X0 yweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
: L& J0 B* f+ c5 _3 l* F+ Lstrange 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
! @% d7 Z, Q6 Y- \6 a9 }* q2 u3 Irates. While Ontario homebuilding will reel from a
" s* ?3 T5 N/ }( `1 E. ~! ncyclical downturn, the degree of structural weakness appears
+ F  S* R, R: ^8 m# c3 @) _limited – with the important exception of the Toronto
8 _- @0 M( [* u# dcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
( z$ T* f: O) ?2 wresidential construction in B.C. will definitely droop, we
/ p/ }, ?7 k# x9 h- A2 Fanticipate that the West Coast will continue to benefit from
, g# k  M0 I% o& I; @( P3 n% Z1 Yinter-provincial and international migration over the coming
0 c- \* O: b. B' W# u3 J5 Fyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
4 p. P& ^; b: dOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
7 e9 x# N! s0 n# j416-982-8063
- w4 V& C7 G8 u5 g2 i3 P, c2 YPascal Gauthier, Economist
416-944-5730
+ H* Z# {! `7 u6 b' u8 A
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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