TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
% S/ @. S1 l* i) k3 \* zfrom 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
1 S: y. X$ G5 S& R' _" e! Hoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
! v* j1 Y) _6 Y% a" n12%, 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
' B& |' [# t( H0 {. T( m9 ^. M$ Raffordability. The current unwinding of house prices reflects
1 h2 a3 U# G- b8 E5 xboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
7 ^; N6 |, m6 O! v% V; xWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
) Q' o+ |) k0 J3 Nwhere builders accumulate excessive inventories. Although
6 p) M3 N  B4 L& Othere is evidence of both types, we contend that Canada’s
1 W; |; ^0 f& |+ x“overbuilding” was mainly of the first type, where
1 m4 G6 m8 b  K8 x+ k2 Lhomebuyers pushed homebuilding to an unsustainable pitch
) O$ T/ V; t$ C$ q7 p6 pthat is now being rapidly reined in.
1 k' C+ N2 u* w9 dWhile most markets won’t face U.S.-style overhangs,
; L) M% q9 j8 G9 Uthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
; f0 ]3 V( z3 w% v5 Von markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
1 n" B) a* m2 [3 O, _9 kremain choppy and new residential construction will be
8 [( H! z" i# L$ Edampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
0 k7 R$ j0 S* Y+ ]/ E3 d0 h; U125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
# w8 t7 z) J1 b' P. N# |7 c8 ivalues since house prices should track incomes over the
. S4 `1 h5 ~' L; t7 qlong-run. Since homebuilders build to meet demand, we
; S# Q5 }1 u( o5 yregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
* F! G& J- G0 l/ d3 Y3 ?1 X“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
' V  p$ V% c, Sfundamental-justified level by about 12%. Although new
; P7 y5 f1 p0 M0 F' runits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
* L0 G* Z/ _* ]3 Y5 URegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
/ S# ?4 N) o) R  z- N# G& npopulation inflows. Saskatoon, Calgary and Edmonton are
3 h- e7 Q/ o/ ]1 `% B0 p5 @already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
6 S3 `2 x6 g# Rbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
8 ?/ U2 y1 |( T' G5 z% U6 AQuébec shows signs of strain – especially given the
# |; p! K) ~* w( h; Ustrange accumulation of unabsorbed multiples on l’Île de
2 p9 t" M0 O0 v; ]; \; ~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
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
$ I9 M+ _* G" ^" o: K  g0 L9 R* dcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
, C- c% }+ V7 M$ \4 Lconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
9 h' R/ o0 _6 S1 X/ J0 t4 Ispike 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
inter-provincial and international migration over the coming
; ~9 C" g- n' h  m0 qyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
  @7 D, }. I1 B$ FMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
% K0 g$ H! C  G% xPascal Gauthier, Economist
416-944-5730
, w0 e* [- Y; R! L4 O# e2 c
http://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙