TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  x0 O, q; w; f/ F: Vfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
6 N1 r4 Q& f5 s$ L/ ^prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
' W7 w# H2 _; b2 vthat exceeded its fundamental-justified level by approximately
; R6 L' @/ K- {" @% z4 P% }12%, an excess that was exaggerated in the past
- a/ L9 A  M1 ythree years.
By “overpricing” we mean that prices detached from
' j/ u. ~6 {& N) {8 b6 vtheir fundamentals, as witnessed by a steep erosion of
8 U& S# @" {( b3 jaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
; n- w- r- h# U  t4 _We consider “overbuilding” of two forms: “demanddriven”
( }' c; ~9 n) E3 R5 d; Awhere homebuyers buy up too many houses and
7 G4 w4 I  q5 Sthat this demand cannot be sustained; and “supply-driven”
$ z; r! x* r% b8 Qwhere builders accumulate excessive inventories. Although
( m0 P: Z( b, R7 Y( q  h0 rthere is evidence of both types, we contend that Canada’s
+ J9 T3 x: u! Y7 L. l) E) W" d# O“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 A- u2 O5 m) ~While most markets won’t face U.S.-style overhangs,
' Q8 m1 x% f7 y: Zthe 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
/ _9 |  E* u/ G- [5 xfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
  }0 X" ^* b4 ~2 o* ]3 tis now undershooting fundamentals and we expect this
4 Y" }# O0 C( h( l8 Q! T- i5 @- nto persist over 2009 to 2011. We anticipate that nationwide
) k, v) w! U) Qresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
7 Y0 w! K9 Y, L1 s- a+ ^: Pin the fourth quarter.
7 `8 Z; J- n# ~% w# {% YTo quantify the degree of overpricing and overbuilding,
% W5 a! i" ~! `2 T! ]# s! cwe first develop an empirical model, based on long-run
7 H2 X( U/ g+ ^1 l& `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
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
' w6 S% d0 j6 C. H/ Z/ p; w5 JTo examine the degree of overbuilding, we employ a
' n6 ~6 E0 D! L' U“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
9 J3 g$ v( A' _7 F5 [optimally. We find that actual homebuilding exceeded this
% i8 C0 b2 a/ n3 }) ?fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
1 p& L) E7 K" ~* C2 `5 z$ \2 }Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
; Z' m" L* D6 c; {% ~& E, Dalready 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
3 f8 F# E  W/ H1 r/ ~5 ghas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
& ~5 j. M3 E) D" J) o& ]Québec shows signs of strain – especially given the
) u4 \$ x, s6 i0 w" k9 Astrange 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
# ?( O( `3 [' L$ @. H1 @rates. While Ontario homebuilding will reel from a
, G# X+ p4 f  N/ G0 s& a4 q& wcyclical downturn, the degree of structural weakness appears
" T& x+ h* d" @3 i9 llimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
  x, G  Q! {' a' Z. lreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
7 L- D2 Z& t. {- e7 B4 xresidential construction in B.C. will definitely droop, we
( C2 Z/ y3 N! G3 u0 F4 R. Q" A2 kanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
8 Y9 k8 a! c8 Q3 _& i. Hwill alleviate some of the pressure from overbuilding.
. O7 s  J9 |, t" GOVERPRICED AND OVERBUILT: CANADIAN HOUSING
* h' i! C% D- T* fMARKET RETURNS TO FUNDAMENTALS
/ H% [' s- [- x5 N1 ~! x: D& OGrant Bishop, Economist
5 K( R: g/ p8 z* I  \416-982-8063
! G* Y9 i  q. J6 ~+ J- YPascal Gauthier, Economist
416-944-5730

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

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