TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
) ]2 c9 q7 L8 D, e* R5 b4 L$ {unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
" e% r: r" i+ R; X! c' b9 K: ^+ K$ Ifundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
* H9 I% z3 _# sthat exceeded its fundamental-justified level by approximately
$ h! l! B) F' s/ F+ b. W8 k12%, an excess that was exaggerated in the past
three years.
% ^0 y  B, m: s- _& A) xBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
4 Q" v5 r% V' ~$ p+ b& U! J- Gboth a cyclical downturn and a return of house prices
' E" H9 ~7 V# z1 d. Eto fundamentally justified levels.
; }  Z; I# P7 l0 _6 {/ b% S# M4 b  [We consider “overbuilding” of two forms: “demanddriven”
8 ~- G) X; Z1 |0 [" N5 M8 u" [where homebuyers buy up too many houses and
that 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
“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
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
! b# d7 h4 x4 b3 o5 S! mremain choppy and new residential construction will be
) a( L$ b9 c+ k  w; Qdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
- e: D, S" s3 ?; Jresidential construction will fall further to around
* F2 y" b% P  T* y125,000 starts over 2009 with a trough around 115,000 units
/ |3 X3 F2 P3 O5 v$ `in the fourth quarter.
/ x( {* }+ Z& N) h0 BTo quantify the degree of overpricing and overbuilding,
% V; Q& _* S' u6 Z: r# i, Jwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
- g! u  k4 ]$ y7 uprovince. Affordability is the key concept behind home
* C! f7 K6 R3 y) o  ~8 ?% d% _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
of residential construction.
0 J! N2 F$ w  I8 K& CTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
  c2 D! p9 m  moptimally. We find that actual homebuilding exceeded this
2 R& K5 B3 R& o! I, {$ Q  xfundamental-justified level by about 12%. Although new
' F- q7 R( {: J0 c2 C3 t; H  l9 sunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
7 c( L. c+ E6 ?; B8 M7 n$ a# {where housing demand will further contract under waning
9 A+ F% I8 X; i4 ?( l3 b+ Spopulation inflows. Saskatoon, Calgary and Edmonton are
* J) n5 A, q, i* z1 s7 ?& Ualready 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
has been relatively balanced but, while not plagued by structural
% ?/ \: Z: y, Z5 v* Qweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
$ w- x$ g: W/ rstrange 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
- f# n" t4 j- s% q4 d- y2 irates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
# j- X1 N+ g; u/ rlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
' D' }: j8 ~' ~high levels of apartment-style units presently under
% g& n; o3 Q7 ]construction mean that record numbers of condos will
; F2 h" y: ]3 \. Rreach completion during 2009. If absorption rates fall, as
, y& `: a  p& Q) Vcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
# _% m" O9 C; c. n5 `$ r  Z" q' Wresidential construction in B.C. will definitely droop, we
: \: J9 s* H3 g3 banticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
5 }9 ^2 k3 V7 r( W8 e7 Qyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
1 h8 {0 c7 j, K2 X' o$ v! IGrant Bishop, Economist
416-982-8063
$ p+ c2 L! s$ j" A) T. H; b5 lPascal Gauthier, Economist
1 E0 k! F. i( w0 r; E# {  v416-944-5730
1 g, @2 B' F$ G% S
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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