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
" l8 q) Q  V: r3 a' ?( aunsustainable levels of building. Our view is that house
4 ^/ G* e& f1 d4 N' V0 ~prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
1 F' J- `- Q6 x! K! [* P1 eoverpricing compelled a level of residential construction
. b* U; p6 d# f0 _0 W* Zthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
( v  O$ L6 O+ \9 R0 q: Uthree years.
3 L8 n& j7 X0 {4 k/ w2 EBy “overpricing” we mean that prices detached from
3 J4 z+ d5 b) Y" ?' f  p. |their fundamentals, as witnessed by a steep erosion of
2 q# Q8 e. n# K3 f0 h  u& laffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
0 A* m7 a8 c7 ^' H) Rto fundamentally justified levels.
8 `( x& |: _* H, N, u1 j( PWe consider “overbuilding” of two forms: “demanddriven”
# p' l. G# x$ l/ z8 T" rwhere homebuyers buy up too many houses and
) h' t+ }! j* \: B- }; hthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
, S; J$ C) h* E/ E5 o; Pthere is evidence of both types, we contend that Canada’s
6 b1 G/ I& M6 ~- H/ D5 O5 m3 M2 J“overbuilding” was mainly of the first type, where
! L0 I2 G% w0 j: s: Ahomebuyers pushed homebuilding to an unsustainable pitch
6 v- o; |  X: Z. a9 T1 z8 ythat is now being rapidly reined in.
1 c" r: }7 }( R) _While most markets won’t face U.S.-style overhangs,
( w$ g7 w- v& D' O: t+ |3 Wthe 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
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
. ~% [& x6 t  Pdampened, owing to this structural weakness. Construction
( g/ w7 E. F" U& t: }is now undershooting fundamentals and we expect this
8 Y+ b) [1 e7 V* N8 N1 |- Mto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
* Y3 C/ i3 T  K3 \" b( [7 G5 [125,000 starts over 2009 with a trough around 115,000 units
1 I$ b+ p8 D( E; Y8 min the fourth quarter.
# C( H* O/ L% G- E8 N2 z8 ?9 k; ?To quantify the degree of overpricing and overbuilding,
4 P+ O) @4 q* R2 d8 v' G9 ]we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
- _* }2 }% @% ~5 M, v& J' {- Bprovince. Affordability is the key concept behind home
* p# R; O, L2 c( svalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
- j3 A- q1 ?* Q0 V" Zregard housing prices and household formation as the drivers
5 u8 ?1 Y8 L  E7 S, ~% mof residential construction.
To examine the degree of overbuilding, we employ a
6 O* [9 I% t% }“counter-factual,” asking what level of residential construction
3 c1 b* m: q" `( f6 [' U; n/ gwould have occurred if housing had been priced
5 P& S% y/ @9 T! b7 A% Loptimally. We find that actual homebuilding exceeded this
5 g* v( }0 D' g0 [+ [fundamental-justified level by about 12%. Although new
5 B& m) V% ]2 @8 g( ?0 Iunits were being absorbed, homebuyers simply bought too
0 z" x4 d- X4 s6 z4 q8 Rmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
3 a1 m, P2 b/ s# j9 Lvery time that the resale market has swung into strong
6 M- H$ L6 ^& c) fbuyers’ territory. Homebuilding in the Atlantic provinces
* ^5 z* d3 A$ rhas 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
/ _0 W7 W4 t# ?9 r  @! R/ \strange accumulation of unabsorbed multiples on l’Île de
& B% y( u; L5 B! W& j' eMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
& z% q+ w) v3 h: ^3 vrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
+ k4 G: i. U% o* T. Z; C2 R5 _construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
- {2 B( j1 C0 ?cyclical factors would indicate, condo inventories could
/ O, ^3 E  ~5 L) wspike severely – particularly in Vancouver. However, while
/ V$ K8 {7 S; a4 P9 ]+ Gresidential construction in B.C. will definitely droop, we
4 W& o& t9 Y% Ranticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
( d3 ~  o  a2 |& J7 xOVERPRICED AND OVERBUILT: CANADIAN HOUSING
5 Y% [9 m1 G' H9 {$ _- CMARKET RETURNS TO FUNDAMENTALS
- S# A. Q3 u. A5 uGrant Bishop, Economist
& e- c" a0 p* n4 o416-982-8063
Pascal Gauthier, Economist
$ k4 d9 m5 a/ N416-944-5730

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

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