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
unsustainable levels of building. Our view is that house
9 k4 u5 d1 N% j! W" ~prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
- @. r# t' \+ R8 H; M2 s$ Loverpricing 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.
By “overpricing” we mean that prices detached from
3 u4 m# C5 U, E) Mtheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
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”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
' R" m# I# C$ v0 c; S, J. N' a“overbuilding” was mainly of the first type, where
4 n( b1 j/ g1 }. O2 Dhomebuyers pushed homebuilding to an unsustainable pitch
8 q' E* `% b  \$ i- {( kthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
  d* ?0 q* ~* \- u& Lthe construction of too many new homes over the boom
& o6 n8 p, S1 ]' e, A- {means a deepened slump. This overbuilding will likely weigh
2 b( k9 t" i* P: G$ b; Von markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
8 r0 u6 p' s1 i1 |remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
# y# y9 b$ F, p. R8 }is now undershooting fundamentals and we expect this
/ q0 }2 y. N7 B2 M, }" ito persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
0 Y7 {: V& F3 l# |5 ?) B125,000 starts over 2009 with a trough around 115,000 units
4 c3 \: Z8 A6 i. }9 Fin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
' e0 [, }) l6 x6 A5 Z6 bfundamentals of house prices and housing starts in each
) U2 d, y* f$ q/ Lprovince. Affordability is the key concept behind home
6 J$ D6 y" g- o, {) h( t/ tvalues since house prices should track incomes over the
5 x  M, ^6 X3 f) _long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
5 L: z$ n& n% m8 VTo examine the degree of overbuilding, we employ a
2 x2 x/ l+ h8 x6 l' O; w# @“counter-factual,” asking what level of residential construction
5 e  C( K' J5 Y! c! p! fwould have occurred if housing had been priced
8 R* Q& G0 c0 o) H$ eoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
- H7 M! |" v* }8 y* F0 `; punits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
# T* b1 b# p: S; l6 b/ x& Iwhere housing demand will further contract under waning
3 N- b0 I8 d3 _) v8 U" wpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
' w& ]4 @# `* C! Y) C9 G8 F+ J8 }) Kbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
$ B& H4 r( X1 Q/ E7 e, L) Dweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
" I8 Y3 \: o4 n  p- c% S  @+ IMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
2 v; N( p$ z# v9 d; S% Q5 srates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
6 p6 L# U5 q3 f" fcondo market. Both in Toronto and Vancouver, historically
8 K. N7 ?! g" y" K& Xhigh levels of apartment-style units presently under
8 H* H' n9 v- i( p% G- Rconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
6 l9 y3 S. F9 D$ s2 Ucyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
% l4 f" B9 C, @0 ?inter-provincial and international migration over the coming
4 F3 d/ f/ t- `7 A# Dyears, which, along with improvements in affordability,
7 _; p1 ~* @& ]' Owill alleviate some of the pressure from overbuilding.
( h5 P- e3 r! f5 q6 S# t2 _& WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
; G1 T$ ~; z) N0 `. x& W1 j9 BMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
) H2 W. Q/ m% D2 t416-982-8063
. B2 q$ k0 r8 A7 C; E. y* q  sPascal Gauthier, Economist
416-944-5730

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

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