TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) D* s) A2 [) j: [% S& lfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
' V) C. f7 n% Y$ }; {4 m+ hprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
, s. s6 V+ ?& T: J) g) e+ b# e2 \5 coverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
/ ]9 y, V& E! c) t% F12%, an excess that was exaggerated in the past
three years.
' p7 |& v6 w) x2 v$ aBy “overpricing” we mean that prices detached from
7 Y0 g0 T/ `# C) A3 \0 m6 n; Otheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
: Y  f" F, C9 Q9 Cboth a cyclical downturn and a return of house prices
- E% ~4 R3 X5 x: f$ L9 Y6 T( p- nto fundamentally justified levels.
, `, E3 \+ N" s  O" r" }7 |We 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
' Z% Z3 \1 r2 d, `! hthere 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
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
means a deepened slump. This overbuilding will likely weigh
8 Y' C- S% r: w; don markets over the next few years. Even as Canada recovers
9 `; ?! X8 E  ^! Dfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
/ S! C) Z5 i& L; Z5 x1 i/ ^is now undershooting fundamentals and we expect this
% R* y7 \0 J0 P5 @* u4 F: Fto persist over 2009 to 2011. We anticipate that nationwide
' o; q$ v3 [1 j! j4 gresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
& {7 \+ B8 _+ S" i% Win the fourth quarter.
To quantify the degree of overpricing and overbuilding,
; q% Q- x' X& f$ D1 J& s$ T+ Qwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
* m- {. f" b' U6 D2 @. _, Dprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
: a' u+ k3 s  J9 Rof residential construction.
, E+ ?  o2 }! R! n# uTo examine the degree of overbuilding, we employ a
4 j0 \, J% w& v- Q8 X' {6 T2 [“counter-factual,” asking what level of residential construction
3 a& T7 G; \! b7 I( f  v4 Gwould have occurred if housing had been priced
+ J' N: P# c, u3 ioptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
- C2 ^, a0 Z  u3 X" q1 ]1 Y1 l6 b7 bunits were being absorbed, homebuyers simply bought too
0 Q1 T8 a7 e# @; z1 j# P, Vmany houses at prices that exceeded fundamentals.
1 F/ n' w( H; {) @0 _Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
5 k. v* Q( w+ }( l( a: U3 i/ g) Talready witnessing surges in their unsold new homes at the
2 N: ?& J' v& g- Mvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
* a/ O7 T7 `8 U, R0 I% ~: Nweakness, will be singed by the downturn nonetheless.
; m% W* c& w1 l+ _+ K- |Québec shows signs of strain – especially given the
+ u' E& f0 \) J, xstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
# J) ~$ Z6 ~3 I, kgiven the province’s history of under-building and low ownership
# u- a. y8 v7 Q9 W4 Orates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
$ _+ J% L. Y6 x6 m8 b2 j$ Hhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
/ F8 I. T: L- z# U% A% ~reach completion during 2009. If absorption rates fall, as
2 z% U/ G2 s6 b0 L- V3 xcyclical factors would indicate, condo inventories could
! b% f( U* k3 P7 xspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
8 p! c! T! k. Xanticipate that the West Coast will continue to benefit from
. N* A' w* T* L( K! w* ^inter-provincial and international migration over the coming
7 x9 s% ]) [& B. Hyears, which, along with improvements in affordability,
6 e7 }; w5 A0 ^5 \: A7 k6 _will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
# T! G' W- m' [  s* i$ {, NMARKET RETURNS TO FUNDAMENTALS
$ u0 d7 Z) O9 {2 g( b' h3 [Grant Bishop, Economist
2 @- v" ?8 I* @8 c416-982-8063
! z& W( w+ _2 M$ O5 \Pascal Gauthier, Economist
416-944-5730
& Q! C+ Z5 [; o2 H/ {. Y* y6 w6 |
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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