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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
- H/ S, ?& o0 B) d, {# b! ~from 2002 to 2008, unsustainable price increases drove( {: b1 O. D0 H9 P$ g2 I
unsustainable levels of building. Our view is that house
  l* D7 o1 H+ j3 L2 j( Oprices exceeded the value of housing that was justified by* ]; r8 Q) D0 b$ v
fundamentals by approximately 9% nationwide. This
% ^! V+ ^$ e7 Z8 ^# Y7 ]* hoverpricing compelled a level of residential construction
$ n1 h: a' [8 W3 w, |+ p% z5 Ethat exceeded its fundamental-justified level by approximately  x- s2 r7 W, z$ u- Q1 g$ z- ]# S
12%, an excess that was exaggerated in the past1 g- W# r' I# ?% B0 @' n
three years.& p  M" O  c% C/ I; L. B# w
By “overpricing” we mean that prices detached from- R. R: u$ }) V( I6 O; s4 g
their fundamentals, as witnessed by a steep erosion of: z5 q. K" L; ]
affordability. The current unwinding of house prices reflects' O( ]. F" h& d4 Y& s6 p
both a cyclical downturn and a return of house prices' a6 v) t! U. M8 }( @
to fundamentally justified levels., a( d9 O2 c$ T( H9 u9 j, E
We consider “overbuilding” of two forms: “demanddriven”( Z' ^) ?) k( M4 E; m
where homebuyers buy up too many houses and
' D7 _! I3 ^* \3 dthat this demand cannot be sustained; and “supply-driven”
7 Z/ w( h$ ~5 ~. v1 m* Z% ~- y. [where builders accumulate excessive inventories. Although6 W+ f, k# j" p/ _5 n7 z
there is evidence of both types, we contend that Canada’s/ D* F; T! M& y% M
“overbuilding” was mainly of the first type, where5 x( u/ ]9 E4 v5 b
homebuyers pushed homebuilding to an unsustainable pitch! t! J0 a6 ?$ N, C
that is now being rapidly reined in.
! }8 l6 G% ]9 j# N8 b- H; ?: zWhile most markets won’t face U.S.-style overhangs,
( F% e9 ?# c* t# i! f# Y! V$ \$ ~the construction of too many new homes over the boom! \$ m) x$ o9 `: c  X
means a deepened slump. This overbuilding will likely weigh
1 x1 t  l6 j4 ~; d* |* x& Don markets over the next few years. Even as Canada recovers# }/ {# ~. P1 A. P& C% m( d
from the cyclical downturn, house price growth will6 d2 J. x, V! S; W5 y& E
remain choppy and new residential construction will be+ w7 o5 r% U- I- q3 |
dampened, owing to this structural weakness. Construction/ T, ?  t( I" ~* _
is now undershooting fundamentals and we expect this
9 P1 z- G; T3 `: k) J9 l, h! C, d7 vto persist over 2009 to 2011. We anticipate that nationwide9 ?% X7 f. q$ Y- w1 w6 u
residential construction will fall further to around; R- ^3 x5 T1 Z: @' Y3 `
125,000 starts over 2009 with a trough around 115,000 units: E5 `+ w- t" u: F, E
in the fourth quarter.
; I* b, d6 B$ L' JTo quantify the degree of overpricing and overbuilding,
8 t0 }0 c6 W, B$ E' kwe first develop an empirical model, based on long-run
. \" A8 e' P# B7 Pfundamentals of house prices and housing starts in each
0 Y9 t' J( P- @6 ^" Iprovince. Affordability is the key concept behind home5 q6 A2 T$ E+ {' u
values since house prices should track incomes over the, [# L8 j& M6 R; P7 D% G- a
long-run. Since homebuilders build to meet demand, we% Z& a: m3 S. s: F. [! I9 H# O- o6 x
regard housing prices and household formation as the drivers) O+ k, s! E% W) K6 ]5 |. |
of residential construction.
3 W+ S8 X" K9 G  qTo examine the degree of overbuilding, we employ a
- u, j8 [$ B+ }! m2 j“counter-factual,” asking what level of residential construction
3 P, i& Z5 p) Gwould have occurred if housing had been priced
! @/ c; n. A' O: Zoptimally. We find that actual homebuilding exceeded this. B& j, H( N2 a  c; K
fundamental-justified level by about 12%. Although new
/ v1 ]5 ]' f% B% {units were being absorbed, homebuyers simply bought too
2 Q( K. h4 R. T( m7 h$ i6 Q6 Q; |6 ymany houses at prices that exceeded fundamentals.
# r- I3 U' U. P: vRegionally, we see the greatest strains on the Prairies,6 k" p) s! m) n2 B: V4 m
where housing demand will further contract under waning* j( d" P4 q8 b' L) X+ a
population inflows. Saskatoon, Calgary and Edmonton are1 U) _0 k- B  V! b
already witnessing surges in their unsold new homes at the
. E0 N: O7 e4 U4 Zvery time that the resale market has swung into strong
* b+ _4 R' m1 E8 mbuyers’ territory. Homebuilding in the Atlantic provinces
/ W' Y! l2 t: [& `has been relatively balanced but, while not plagued by structural
, ~1 W0 |) o5 r0 Aweakness, will be singed by the downturn nonetheless.0 x7 A6 t( b. p/ z% C9 W
Québec shows signs of strain – especially given the" M; @0 r4 c* s
strange accumulation of unabsorbed multiples on l’Île de
( C3 L8 Y4 s# P+ `; `; ZMontréal – but recent building has been relatively balanced,
" ^& ~7 c/ }4 Q; j- B- rgiven the province’s history of under-building and low ownership. c+ p  H  B  a) p  a6 x
rates. While Ontario homebuilding will reel from a
  T0 N/ B5 Y6 [+ ?6 |0 B. v& K# Rcyclical downturn, the degree of structural weakness appears$ Q9 A6 [5 }* C3 `
limited – with the important exception of the Toronto
  M( p. z" o0 j, B% h; Lcondo market. Both in Toronto and Vancouver, historically8 s! R$ {& o, J
high levels of apartment-style units presently under
1 K8 ?7 R; N+ U* Y# f) O- x9 I: Vconstruction mean that record numbers of condos will
4 J$ \) i* ]0 T' c4 |reach completion during 2009. If absorption rates fall, as
% G1 n; }3 x: `6 }) x: u( ?cyclical factors would indicate, condo inventories could
. }2 h* A& Y  }+ {! Ospike severely – particularly in Vancouver. However, while
" m* B/ c, e5 Y) w8 A; A; qresidential construction in B.C. will definitely droop, we
' A  F3 {3 R. Aanticipate that the West Coast will continue to benefit from2 _3 F) h. O5 b  A9 \: Q( j# Q
inter-provincial and international migration over the coming
( H* t9 \; V( S  Zyears, which, along with improvements in affordability,2 i6 |7 b2 l& C4 H3 I& }! i
will alleviate some of the pressure from overbuilding.
2 `! \2 u4 l8 v2 {9 V" B) G' OOVERPRICED AND OVERBUILT: CANADIAN HOUSING) Q# S( r+ }$ N& m5 o0 c
MARKET RETURNS TO FUNDAMENTALS& z0 W2 g6 b7 P' x5 m
Grant Bishop, Economist8 n9 |6 v4 K; R9 q5 o: r
416-982-8063) k; P+ X6 @$ r9 g4 D
Pascal Gauthier, Economist4 A" B8 Y! x3 k( M! ^8 Y1 Y! ~
416-944-5730
9 W2 I% a( D# G7 z/ L, o! {5 g" p% k" j: [
http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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