TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
! M3 G2 }6 e5 x! s' }, n! ?from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
8 d, m' X, w  ^6 ~" B0 @fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
$ I7 R; S: m; V# x9 s2 M+ ythat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
* m0 G0 D/ m* V; dBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
: b: h' D  T2 Daffordability. The current unwinding of house prices reflects
9 {% p2 J) ]+ M! A2 d: [both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
+ s3 ^5 m2 v6 m/ J) ^6 v! Wwhere builders accumulate excessive inventories. Although
' E! }% g; e! o. F9 Z7 Nthere is evidence of both types, we contend that Canada’s
! S  t5 `  G: R1 T- S“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
6 Y+ c4 q+ s7 ]2 w/ y" J% ~8 r/ hthat is now being rapidly reined in.
' n$ V& F- N6 v9 j# {; r7 ~6 \3 {# `) KWhile 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
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
* x: ^; m/ q- s' z3 A' xto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
! n" r6 N; M  {3 t& v; m125,000 starts over 2009 with a trough around 115,000 units
& A4 V4 X& c  gin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
' W5 k* T0 j2 ]' \; r# Sfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
( b+ b3 n2 j8 zvalues since house prices should track incomes over the
+ `% n/ u3 e! p* K* Y2 u, w$ Slong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
" Z1 p  \1 ^8 G8 S; ?& |would have occurred if housing had been priced
6 H. P2 h0 t7 L; [. Uoptimally. We find that actual homebuilding exceeded this
$ K/ e$ p3 L7 r7 Efundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
( x7 o9 x# _' y- R: Zmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
" S1 \& v* r2 K- twhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
: K. M- D$ y) J. @, `( {already 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
( P1 Q% e. M4 w! {  y# Yweakness, will be singed by the downturn nonetheless.
# o7 _  J( V! b$ m( `; `2 MQuébec shows signs of strain – especially given the
9 ^7 o) j. p. O1 K7 `strange 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
rates. While Ontario homebuilding will reel from a
# V! M2 z. m$ N% Ccyclical downturn, the degree of structural weakness appears
0 R& [* W" }! q# I- |; m3 nlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
3 u# v9 W% b% z" E6 a* Ohigh levels of apartment-style units presently under
( L* q' `9 _' ]: Vconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
( }, \/ T2 O4 {$ S/ ]7 ispike severely – particularly in Vancouver. However, while
1 k# n! T& G* ?. n6 I# D% Iresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
: {$ G8 J4 `0 V  m: ?) |1 t: I& Linter-provincial and international migration over the coming
years, which, along with improvements in affordability,
. K5 S" N/ N  f! Owill alleviate some of the pressure from overbuilding.
  s( A7 b4 ^; p5 ]: k: bOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
. e9 v5 K% Z8 I% n; b4 [8 E, OGrant Bishop, Economist
& q- ]5 f8 j% x* d2 E- I416-982-8063
Pascal Gauthier, Economist
, B7 p4 Y0 ?! g4 W& \! E416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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