TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
( G2 d8 i& D- x4 z# l& y9 Rfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
( Q$ H6 r& y! q$ Hprices exceeded the value of housing that was justified by
- ?9 b5 k. O% X/ {fundamentals by approximately 9% nationwide. This
  _* x$ ~* Z, Hoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
1 a* Z: c& N, x! X7 G12%, 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
* Z9 E2 j9 |* k  E0 Z3 Mto 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
; E/ d% }* x- H“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
$ g2 Y* R; q: ~, Tthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
2 R6 z: N& M8 y% e6 Q$ a- q+ Omeans a deepened slump. This overbuilding will likely weigh
5 v7 e& m) ?  p' ?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
5 Y7 Q, W' a3 l/ s, e% P: ]# T6 ldampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
* j" g6 u" z% f* b! xresidential construction will fall further to around
; C1 J' r6 N7 ~6 \125,000 starts over 2009 with a trough around 115,000 units
. i" R2 i3 ?% |/ ?' ?; E9 Kin the fourth quarter.
/ [1 H" P. |1 @. K5 L( V& STo quantify the degree of overpricing and overbuilding,
; h+ y% d2 X; H/ z; Z7 lwe first develop an empirical model, based on long-run
8 ^# l3 k  a1 F/ |, dfundamentals of house prices and housing starts in each
" t. x: p- s* u! Aprovince. 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
of residential construction.
) e# E/ W$ t# ?To examine the degree of overbuilding, we employ a
1 k( i8 h0 J8 Q' J; N% u( w  t“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
: u/ }2 S6 {( H2 Wmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
4 B+ F* c5 m  U  ?+ U9 g9 y' G8 Cwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
9 [1 ]" c, N& E: H. ~, |. r; a. yvery time that the resale market has swung into strong
- X' w5 R: A" B0 i$ J# F( |  o7 \buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
/ X) v! G1 e. j- m5 g7 Tweakness, will be singed by the downturn nonetheless.
# P3 G! q! b6 h( X  D. mQuébec shows signs of strain – especially given the
# C5 h" e& E, U9 M/ a1 zstrange 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
9 E4 A0 I+ B( d4 T) Crates. While Ontario homebuilding will reel from a
. ~1 g- t. }; R5 {: B6 Zcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
# x' |* v( d- Z5 F7 I8 Ucondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
% A7 M; `0 H3 G# ?residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
* |; d4 H) w) @: `2 I3 p  q% ~will alleviate some of the pressure from overbuilding.
( t+ K) K/ U" K2 eOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
" \- M+ b) l! D) H  x416-982-8063
! n5 C$ e7 i1 b/ D) b! iPascal Gauthier, Economist
( x9 [/ J! w* D416-944-5730
  ?, e& D. D5 C3 w1 f
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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