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
prices exceeded the value of housing that was justified by
, i% d' n1 q7 @! ^6 |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.
By “overpricing” we mean that prices detached from
their 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
% W9 F7 X2 s" n" I9 X5 Lto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
6 F+ x; c  I; e7 w' C! mwhere homebuyers buy up too many houses and
6 L4 \; |' |: N( I6 K3 M$ [' y0 E5 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
“overbuilding” was mainly of the first type, where
" h& }. d" @2 R+ |7 C& I4 C/ ]homebuyers pushed homebuilding to an unsustainable pitch
! P9 b( m5 d: X) C! Qthat is now being rapidly reined in.
( x( X8 v. }% F, ?While most markets won’t face U.S.-style overhangs,
; }5 ?0 K+ O. }+ F) mthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
: a7 i0 A- ]  N& ton markets over the next few years. Even as Canada recovers
" N- N- `* n' W# Y  Yfrom the cyclical downturn, house price growth will
! o0 Q# L- j8 X1 |% o# Zremain choppy and new residential construction will be
& n; S% h8 ~7 Adampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
- _" E2 C% o8 n  u$ j& bresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
; g$ b; v6 E  q6 ~we first develop an empirical model, based on long-run
- ]: _% w3 }) |fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
/ L# D  v) ]- B; m/ p( T* i0 yvalues 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.
- I9 A7 S* l7 B2 j9 K: zTo examine the degree of overbuilding, we employ a
* S( [! A; s* a- S+ g) W& [# A“counter-factual,” asking what level of residential construction
* }' O% q6 S0 D$ J4 @would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
6 ]- J; L4 B) ?. \units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
0 f3 \7 k( Z9 ZRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
5 T" G$ \# k! ^( C/ xpopulation inflows. Saskatoon, Calgary and Edmonton are
+ B3 J9 q, o0 ]5 kalready witnessing surges in their unsold new homes at the
0 a/ c( {% h5 K8 q  g1 m+ L$ e2 K/ Pvery 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
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
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
6 E( C* D4 W" A& Crates. While Ontario homebuilding will reel from a
6 Y+ D3 o9 B- Pcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
6 p/ S$ @8 z, L4 L6 r! D% Tcondo market. Both in Toronto and Vancouver, historically
) Z  p3 L: U4 W4 h; j2 Ohigh levels of apartment-style units presently under
& |! [4 g! I$ Y3 [9 X" a& N, `construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
# z2 [3 }+ x& X& u0 T5 e2 Uspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
: M, _7 s) S6 w9 w: t( santicipate that the West Coast will continue to benefit from
/ H9 [: R. z, U2 b. }$ Binter-provincial and international migration over the coming
; k" l6 C2 C6 R* x1 Lyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
" {# c$ i& ^- \# H# m- lOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
1 i0 B5 h& H, U, w9 {416-982-8063
9 _* q7 t4 L3 l2 r( A3 m( \Pascal Gauthier, Economist
9 u6 i/ @/ `' c* \- F1 Q416-944-5730

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

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