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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly. F2 E* _* {8 ?  O
from 2002 to 2008, unsustainable price increases drove* A0 j( O: l& S  k9 F# \( u
unsustainable levels of building. Our view is that house1 t$ k9 \0 b3 D4 h/ b% \9 X* s
prices exceeded the value of housing that was justified by
2 i* W3 M% \; g' d& s/ bfundamentals by approximately 9% nationwide. This* q5 k9 Y. E' v" Z
overpricing compelled a level of residential construction: I5 X; `% E6 ~$ K) f. _  l+ @0 L
that exceeded its fundamental-justified level by approximately
0 k  u3 z4 V! j* G: T/ F& _* X12%, an excess that was exaggerated in the past
: }' T$ ]! n) b  |three years.1 X0 A3 Z  I9 V/ B* Y
By “overpricing” we mean that prices detached from
/ r* Y, r' `- k5 A3 Z4 btheir fundamentals, as witnessed by a steep erosion of
; K! k0 }  n( ^4 \7 s  taffordability. The current unwinding of house prices reflects
; x6 u" l, D7 O& y8 d% Kboth a cyclical downturn and a return of house prices
# w$ O6 V: q& c! D! Yto fundamentally justified levels.: K8 m, K1 O$ N2 Y
We consider “overbuilding” of two forms: “demanddriven”
- a) w, {8 s, Z7 ywhere homebuyers buy up too many houses and/ j) r& n' e" u: Y  O" j
that this demand cannot be sustained; and “supply-driven”/ R# N, Y5 [4 t! P7 T- X
where builders accumulate excessive inventories. Although5 o1 _/ G8 F0 ]2 g) \2 z4 F
there is evidence of both types, we contend that Canada’s
5 b( k( p4 }) C; U2 _/ P“overbuilding” was mainly of the first type, where
" Q! M7 f9 p: F& W8 jhomebuyers pushed homebuilding to an unsustainable pitch2 V0 S8 w7 G5 U/ M+ q
that is now being rapidly reined in.
3 f( G4 Y/ x* T! N' A( c6 d6 oWhile most markets won’t face U.S.-style overhangs,
. C) B" r  G6 Rthe construction of too many new homes over the boom
+ z; Q$ g/ Y  t# i, Imeans a deepened slump. This overbuilding will likely weigh5 H3 l5 `# T! Y- m  ~4 R. v
on markets over the next few years. Even as Canada recovers/ L6 ?. f% z4 c, m3 G: w( r
from the cyclical downturn, house price growth will
/ r$ r$ @, w! N4 ~9 s; t: l  c8 Oremain choppy and new residential construction will be
7 s* h0 M( \2 c$ w5 p4 \, ?  Qdampened, owing to this structural weakness. Construction
. O5 u1 X$ c$ ?! L+ Sis now undershooting fundamentals and we expect this. N8 V2 T% L; }6 j$ W4 S9 |& q; l
to persist over 2009 to 2011. We anticipate that nationwide
9 k6 k/ L0 U4 k' @. L  cresidential construction will fall further to around0 o1 z. f6 a( S1 f( {5 U: _
125,000 starts over 2009 with a trough around 115,000 units  {" a* e: G: z: w1 o4 p
in the fourth quarter.
9 Z3 s" n. P( ], F& z  sTo quantify the degree of overpricing and overbuilding,) v+ d1 S# H+ c5 y- i; ?
we first develop an empirical model, based on long-run( o7 F# H  K9 }8 _) l' B
fundamentals of house prices and housing starts in each
6 S* v# o% ^" ~province. Affordability is the key concept behind home
/ k- N8 ~. \2 E, L3 B8 Y- ]& xvalues since house prices should track incomes over the6 ~, t* ^4 T7 z3 i0 F/ D7 Q; F
long-run. Since homebuilders build to meet demand, we
* P; L' _7 u& G" i3 V$ T/ Q' Lregard housing prices and household formation as the drivers
! f* R7 L* P. c; }; b, l  ^- _of residential construction.
: q3 L: ^0 ^7 [% s( g& u5 {To examine the degree of overbuilding, we employ a
6 k  Q3 b* A" b“counter-factual,” asking what level of residential construction( Q$ U, t% r  l0 R7 V
would have occurred if housing had been priced! o3 L, J) o9 ^& l8 p  @
optimally. We find that actual homebuilding exceeded this0 ?$ _& S9 F8 b- M4 n1 S
fundamental-justified level by about 12%. Although new
; I" y. o% m7 p3 c: X" T" B8 O, o3 Vunits were being absorbed, homebuyers simply bought too
  }& C, C: g6 |6 Rmany houses at prices that exceeded fundamentals.0 o+ q, t2 d, Q5 T/ V$ C
Regionally, we see the greatest strains on the Prairies,8 O! P% }; M- i: ]! N
where housing demand will further contract under waning
6 R1 ^" P2 X8 L7 B  Q( Gpopulation inflows. Saskatoon, Calgary and Edmonton are2 k* T  W  R6 A5 T. O2 X6 t
already witnessing surges in their unsold new homes at the3 o  ]- W" v* l/ C, V
very time that the resale market has swung into strong% \& P( ^1 _$ V
buyers’ territory. Homebuilding in the Atlantic provinces
) B, e- G3 m; p5 chas been relatively balanced but, while not plagued by structural
0 j( U' W  Q+ x0 A* u' g. Zweakness, will be singed by the downturn nonetheless.  A! t7 T8 ?* d
Québec shows signs of strain – especially given the
- z4 N) x" b* _3 ~7 A  X' c* Y2 [strange accumulation of unabsorbed multiples on l’Île de; A# X9 t0 h0 m: R8 N0 ~
Montréal – but recent building has been relatively balanced,
8 s  R# b$ u0 H& egiven the province’s history of under-building and low ownership
5 ?0 p# T! u. x/ R3 f" @rates. While Ontario homebuilding will reel from a
* |+ ^! F. z1 q& Ucyclical downturn, the degree of structural weakness appears
) k. l1 Y; _. x) f+ U8 }limited – with the important exception of the Toronto
- u/ r* g3 _: dcondo market. Both in Toronto and Vancouver, historically5 _9 g5 y/ v  |7 h
high levels of apartment-style units presently under
2 O' `. K9 W- T+ q  o, J1 wconstruction mean that record numbers of condos will4 t; B& U) s' d0 l% U4 G
reach completion during 2009. If absorption rates fall, as5 ?- H9 ~- u: J! \7 Q4 r7 k
cyclical factors would indicate, condo inventories could: Z  x8 |5 H  D7 s: e
spike severely – particularly in Vancouver. However, while
* M' j* g$ @8 M9 P7 M9 V$ _) bresidential construction in B.C. will definitely droop, we* ~$ i' U% N; R8 k
anticipate that the West Coast will continue to benefit from
  }# L( G6 x; B7 `' z- }inter-provincial and international migration over the coming
" j% {, J( M  u8 t. f7 kyears, which, along with improvements in affordability,% u* i6 e. ?5 Q! \% Z- Q
will alleviate some of the pressure from overbuilding.
$ ^9 m) u7 V4 P* |  D! bOVERPRICED AND OVERBUILT: CANADIAN HOUSING: u  ^4 j! t/ w4 y
MARKET RETURNS TO FUNDAMENTALS
- |$ e2 W; u6 P/ R+ K$ p( ?4 DGrant Bishop, Economist. x9 p) R: [3 n% {$ t/ V
416-982-8063" U6 `2 e$ z: \% d7 v3 y( \7 a: u
Pascal Gauthier, Economist# l# t! h' R8 L4 ?' i
416-944-5730; }1 A# U3 U$ S! {4 O8 P+ S

3 e: h2 B1 K3 L! F9 ^http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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