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
7 O" [+ Y5 J0 y# M  Y6 k, runsustainable levels of building. Our view is that house
! z1 _. Z: g4 [& d) |) Tprices exceeded the value of housing that was justified by
+ f. ~/ V* R3 C, Kfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
6 }8 }4 R; [: w$ G% H3 F12%, an excess that was exaggerated in the past
, J# ?. i$ h( t$ A: `three years.
% b: }: O% c4 A2 _1 c8 o* CBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
& Z% z6 V& I8 S% l# ]both a cyclical downturn and a return of house prices
9 J9 L  x8 i+ A9 u1 wto fundamentally justified levels.
' ?2 I3 v9 X6 |% X% f$ t# Q! L; |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
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
8 U& N. x' U" E1 @, i$ x& `homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
) A: ]7 W; }0 |0 O3 e6 kthe 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
- D; c4 z+ V- d( m# _from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
- K6 v4 Y. M- i# y/ Nis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
5 P% p. ~. g3 [! e  K8 ]125,000 starts over 2009 with a trough around 115,000 units
& a$ h6 L* w" i% R# O5 [in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
$ l1 v8 L: G; |we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
; ]4 D$ A! I( P  p( tprovince. 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
8 ?! b$ L* Y8 d4 m: wof residential construction.
To examine the degree of overbuilding, we employ a
  Q8 @% T. _! _, e! Z“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
1 N0 y1 O8 X; T/ @6 H4 Eoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
$ S: R# R) ], U- Mmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
! ~6 A$ m+ R! L+ S4 G, V4 e8 z. {where housing demand will further contract under waning
; c4 t' v7 `9 q$ @: O+ l, C# ipopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
, e0 O, x. o* ~7 _' z  qvery time that the resale market has swung into strong
/ R3 m/ Q" w& R& ^buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
9 o' p9 g9 J6 ]3 lweakness, will be singed by the downturn nonetheless.
6 B+ m/ Z: a  Q/ y: ~- O! ^Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
7 W* I- N# W. ^Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
" T& @) @5 ^" W: ]; R5 [. S2 i( klimited – with the important exception of the Toronto
5 C$ [  I! r' X" ~condo market. Both in Toronto and Vancouver, historically
5 _$ G+ s7 o# D6 I# A- h& ~* hhigh levels of apartment-style units presently under
, Y( L/ s: A7 k; W  z) V* Fconstruction mean that record numbers of condos will
( [4 ?  p* e& Y  ~4 i) p/ ]% _4 [reach completion during 2009. If absorption rates fall, as
- X! E7 u( Y* @cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
/ {' r5 y8 s; S0 eresidential construction in B.C. will definitely droop, we
8 A* H3 t5 d8 @# q1 \anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
6 n. S. z+ _9 |) L7 ^( Dyears, which, along with improvements in affordability,
: }1 o  a, D. G! ewill alleviate some of the pressure from overbuilding.
; P# j+ l. g7 P0 b' kOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
  A5 L0 }) v7 l: ]Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
) m, g, C9 ?: a* V  a  ?416-944-5730
7 E8 o1 E; G/ v* q
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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