TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
& S: c0 A" j9 M1 ifrom 2002 to 2008, unsustainable price increases drove
2 O# z5 J# |+ h7 S" k/ |; A6 [. Funsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
# o4 H& O8 }$ j; Z1 W2 a5 z* o4 N" YBy “overpricing” we mean that prices detached from
8 _: F. h& Y. D4 e! etheir fundamentals, as witnessed by a steep erosion of
7 C3 o, m) e" T6 B5 }& M  `affordability. The current unwinding of house prices reflects
, h* ^9 I# O% P/ a/ c% bboth a cyclical downturn and a return of house prices
# z6 \+ _* g! }) k0 m6 q6 s6 dto fundamentally justified levels.
6 l. L' `3 c+ z1 w* q8 t* @We consider “overbuilding” of two forms: “demanddriven”
$ j+ P5 z6 |6 k1 W% u0 j( [where homebuyers buy up too many houses and
! o" @9 s" ~. D4 B5 _1 c3 \6 Rthat 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
& d4 N! P% g, I3 g% _4 ?5 |8 t# q“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
) F3 C! S& H$ {. |7 O6 x8 NWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
. E* S& S6 Z( V9 r+ Q7 Z) v# ymeans a deepened slump. This overbuilding will likely weigh
. v7 R: [- C! S) _6 ]' U) @on markets over the next few years. Even as Canada recovers
5 ?! ~" G$ v( `0 Y, C" g$ @5 g: Mfrom the cyclical downturn, house price growth will
# O% k0 a/ |) d! |remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
3 }6 U8 p- n( O/ q7 R' K8 F; Ato persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
0 m* a. _, w$ w" e: ?in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
; r; a$ H- l1 n+ c: Ewe 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
) X" Q, D' Q  Svalues since house prices should track incomes over the
9 K4 Q4 [$ h# Q% B: Nlong-run. Since homebuilders build to meet demand, we
+ R. y9 w# D) u# `7 _- Rregard housing prices and household formation as the drivers
! s) ^1 q& W+ H. v: d  hof residential construction.
0 \5 l: I6 J; a: P: I8 JTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
. K4 x& W( l+ I! }! Fwould have occurred if housing had been priced
0 q. D$ j0 E5 `+ W8 j% q3 S1 r% goptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
8 m  I1 a& V$ D2 vmany houses at prices that exceeded fundamentals.
/ a( O" \6 g1 k' c3 ORegionally, we see the greatest strains on the Prairies,
2 j( Z& J6 a& `+ Q3 k/ X7 t/ A6 F8 I/ Kwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
6 b8 v" v7 ~: W! Y; E! C* ~  Nvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
0 X- ]4 J8 B! v6 F& P" |has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
  x1 v8 ~" T5 O8 GQuébec shows signs of strain – especially given the
. ?) x1 w- G, }4 P4 rstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
3 c( z& M! G8 S7 P) l# |0 mgiven the province’s history of under-building and low ownership
( D# U7 ?4 h4 O2 E- Vrates. While Ontario homebuilding will reel from a
, D% D0 E6 \& J1 Vcyclical downturn, the degree of structural weakness appears
/ j; I9 f+ {, Y3 blimited – with the important exception of the Toronto
3 P( l1 a, f8 v% x% F' Y. p" V, Wcondo market. Both in Toronto and Vancouver, historically
) s4 X3 D! I" ~1 g0 mhigh levels of apartment-style units presently under
+ c; y% H. T2 ]2 ~* \) Oconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
  h0 A" `4 N+ a' c6 J- G3 ?cyclical factors would indicate, condo inventories could
, o9 [* i- B" J, M# Fspike severely – particularly in Vancouver. However, while
4 A; G/ R4 ~! P6 ~' y3 X' Uresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
0 z- Y6 n- x9 Uinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
; |0 t  _' Z+ J- h7 g- Jwill alleviate some of the pressure from overbuilding.
* q+ G6 \# a0 \; n& z/ H4 _0 n+ DOVERPRICED AND OVERBUILT: CANADIAN HOUSING
$ @+ U, S8 T2 _; hMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
; o  U$ a, h0 F2 r  v- TPascal Gauthier, Economist
6 V1 S  k9 s5 T7 q2 e416-944-5730

/ V6 k* J  @9 j: dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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