TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
, {& S3 ~8 @$ {; H  C7 `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
: C! q6 J( z0 W$ n  k" r3 {1 F& h2 zfundamentals by approximately 9% nationwide. This
. s) K- r/ o4 e, P1 y0 R3 koverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
1 k" a, b  q* L. ~% p6 N) a- B+ c12%, an excess that was exaggerated in the past
three years.
0 s! o/ c8 A2 L5 ]* H  c6 _% jBy “overpricing” we mean that prices detached from
' X6 u4 z. d) Ttheir fundamentals, as witnessed by a steep erosion of
1 I. d) O6 f/ H2 S0 L) y! vaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
  f( z  ~/ D: v. ^: u$ |to fundamentally justified levels.
9 W2 F. C, c9 k* ^0 x8 ]4 P, [We consider “overbuilding” of two forms: “demanddriven”
1 ~, }0 b6 H/ S9 M& Hwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
0 j. d8 D9 _# t$ X* \there is evidence of both types, we contend that Canada’s
0 N2 z+ ]: h7 u" [/ u; D9 @9 X“overbuilding” was mainly of the first type, where
3 a/ K* U" X" U/ V) J8 [* khomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
, r, H) {- `; F7 `$ sWhile 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
3 a/ m( ^+ @  u9 Q* M1 n; D" a- con markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
6 V& b' M9 l$ N5 Nremain choppy and new residential construction will be
( Y' U) t+ L- B: z9 R" zdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
4 M' x1 _' ?# `3 m& bto 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
1 L: J3 Z8 h, M5 f( L3 u9 Gin the fourth quarter.
6 H1 o! d/ M+ f, H& b: ]; q! X/ ATo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
" p# V( V7 p3 D. T' d  pfundamentals of house prices and housing starts in each
. V3 ?2 V4 P6 n- ]4 C* Jprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
) @) N* t+ O1 a8 H0 F! m5 H6 @1 s+ Plong-run. Since homebuilders build to meet demand, we
( b# I7 ^) ]( J0 N3 [regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
: M3 z" B" E' ]3 r0 u“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
: X/ t  m& z2 i: s0 x* g7 coptimally. We find that actual homebuilding exceeded this
: b* `8 U6 p/ E5 V, O) u' ffundamental-justified level by about 12%. Although new
9 C6 X1 [/ z: W: v$ cunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
7 Y/ j2 H1 E# q. nwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
6 ~2 k/ [) j3 c* R& e" Hvery time that the resale market has swung into strong
; U  N, R1 z, p9 Q( D9 L+ t4 fbuyers’ territory. Homebuilding in the Atlantic provinces
1 D: G& g; h$ L: a9 t9 c- @has been relatively balanced but, while not plagued by structural
& J! f: f: O& w6 s- wweakness, 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,
! {0 d9 B9 K) O/ q# Z* Ogiven the province’s history of under-building and low ownership
; _5 b: F! Q" l3 Zrates. While Ontario homebuilding will reel from a
6 `- G+ P% w" q8 P  L& B# n& Kcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
$ z9 `, ~. R! x. H( g& Ncondo 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
" m. ~" t4 Q. m. ~) ~: C6 Acyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
4 d& k+ |' {1 Q" d$ c! Cresidential construction in B.C. will definitely droop, we
+ r9 _( R! J( x( `) f/ n. `7 O+ Y, Ranticipate that the West Coast will continue to benefit from
2 B9 s3 t6 c) k) _' sinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
" B4 f$ P3 {" P. ^' b1 P6 w% tMARKET RETURNS TO FUNDAMENTALS
- p! i4 X' ]1 vGrant Bishop, Economist
416-982-8063
, Q: s) \. @+ ]/ fPascal Gauthier, Economist
; v3 C6 k: Z9 c416-944-5730
0 ?, k: q0 b- A: X) e: q4 S
( g/ J5 g* @4 g3 ~- Q& j0 |http://www.td.com/economics/special/gb0409_housing_exec.pdf

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