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
fundamentals by approximately 9% nationwide. This
. L& K* {5 H; e' i$ U( O, Y9 ^8 Qoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
& y' A+ j6 W5 S  E$ y! F6 ]+ r12%, an excess that was exaggerated in the past
three years.
8 V0 ]1 [  g7 x9 a; fBy “overpricing” we mean that prices detached from
$ E' x# o9 h* D) p- o3 otheir fundamentals, as witnessed by a steep erosion of
; H. C; G5 V# u* q0 saffordability. The current unwinding of house prices reflects
+ K" o; d) `# `( X2 kboth a cyclical downturn and a return of house prices
; ?8 [3 O$ }4 T" c; x6 vto fundamentally justified levels.
! R# N+ E2 A- h6 }  H# N4 D( z, h8 MWe consider “overbuilding” of two forms: “demanddriven”
9 b# i. i0 c( f1 @9 K& X7 C5 mwhere homebuyers buy up too many houses and
) i- A( G! V# W* ythat 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
5 X8 u; s, L- X6 ~“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
% Y7 B! W; }" E! f. e$ k7 WWhile 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
- s9 p# P0 g/ s# u( H" ]from the cyclical downturn, house price growth will
1 A  d: \" m6 s$ X# p; \remain choppy and new residential construction will be
8 R2 k6 I+ H: f6 B# V% P- `+ Ldampened, owing to this structural weakness. Construction
& @2 M3 }- `! n/ `0 ?9 C2 mis now undershooting fundamentals and we expect this
3 I: S2 t- P+ pto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
# r' E9 ~) P2 Z0 Nin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
: D8 w6 o' S" G/ Zwe first develop an empirical model, based on long-run
% _# Z4 s7 }  V" l3 l- G% @fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
. v  _) E  ?& _2 H5 w! [long-run. Since homebuilders build to meet demand, we
9 U/ j* @4 Z* z  N- w3 bregard housing prices and household formation as the drivers
# o) W3 T) i9 G" vof residential construction.
# d+ u% }5 [4 Q+ f, q6 I8 T! \To examine the degree of overbuilding, we employ a
* i, ^; h  Z% H$ O6 i( r, Z“counter-factual,” asking what level of residential construction
! t6 a4 C" o8 xwould have occurred if housing had been priced
' O9 `5 Y3 i# A# b+ |, Q! A) P. }optimally. We find that actual homebuilding exceeded this
( H3 c% M5 v. ?' s+ r, d, z) pfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
1 }5 s3 c4 m9 M! Z5 r3 u8 L  emany houses at prices that exceeded fundamentals.
* P6 H' E9 N- \1 [: M+ C% p/ ZRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
0 j1 ~9 A3 B5 n* E0 g9 mpopulation 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
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
# c9 U' s" J2 `/ u% v) Kstrange accumulation of unabsorbed multiples on l’Île de
8 T" u. X1 o. X$ V2 _' ?Montréal – but recent building has been relatively balanced,
; O, W, J/ P' X4 G( b, kgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
4 P) _' K0 i* Z' ~4 \6 J" _cyclical downturn, the degree of structural weakness appears
1 o1 X. l9 ^) O* h; _6 Ylimited – with the important exception of the Toronto
9 y4 J( ]5 X3 v: `condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
) I4 g) T+ I- z9 pconstruction mean that record numbers of condos will
! a4 w/ d' r% F( ?; W- |reach completion during 2009. If absorption rates fall, as
  ^# t  t2 l3 B# l7 Acyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
' O! a! Z) ~. Dresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
  I5 M9 ^8 T6 C) w* \" X% ~inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
$ G+ Q* M4 Z. }" l8 ?/ Swill alleviate some of the pressure from overbuilding.
* D) M$ F! K7 J" r( |OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
2 }$ r/ ~) F' |4 MGrant Bishop, Economist
416-982-8063
' M8 M  R2 G, y4 {/ C; H. bPascal Gauthier, Economist
6 r) f$ V- ?5 ]6 V0 @! D416-944-5730
* n. M2 v. H3 I
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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