TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
, m2 \! @( x7 r6 b) e3 }  Zfrom 2002 to 2008, unsustainable price increases drove
, Q; W9 i. G* s# R. y6 `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
" \3 c7 S" J5 [overpricing compelled a level of residential construction
" o9 E, X5 h+ _) R' jthat exceeded its fundamental-justified level by approximately
) O+ h7 @# `5 S, Z' F) ^; d& F4 E$ n12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
+ H9 \4 \' m+ P4 f4 c% U( stheir fundamentals, as witnessed by a steep erosion of
8 |2 Y% j% |6 m3 C4 s  `8 yaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
$ x- \) ], C4 hWe consider “overbuilding” of two forms: “demanddriven”
) M* ^8 x5 T4 g7 {5 ~where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 @; Z2 L+ y/ _- a1 Swhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
' }" A# F$ B& C. ?. E- s“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
- ^$ R8 g  l+ d7 p( m1 f4 `) AWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
/ n" z& G; T% K7 [5 @means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
" ^5 c, g/ v5 n, ~  s$ c9 ^from the cyclical downturn, house price growth will
4 y  g! G9 z2 _# yremain choppy and new residential construction will be
! d1 a1 O3 ]2 zdampened, owing to this structural weakness. Construction
# V/ ?, f# v$ z: I; d* ais now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
$ K+ [7 s' B  x" c* ^residential construction will fall further to around
125,000 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
) p. W* V4 [$ @4 zfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
% N: O- R/ I4 `2 a. I+ A. }values since house prices should track incomes over the
% L7 `; `4 {7 h( T# k/ S4 wlong-run. Since homebuilders build to meet demand, we
- C. X9 y5 {2 V: Wregard housing prices and household formation as the drivers
' t: v, h& Y- \$ E, f& \1 S3 c6 Fof residential construction.
1 \! G& T! s6 DTo examine the degree of overbuilding, we employ a
7 X2 D, n0 u  }; t  B“counter-factual,” asking what level of residential construction
# s. I- N1 L0 M. s; q3 [would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
# [4 b. S7 X! N. z- [fundamental-justified level by about 12%. Although new
  \! s6 L7 y7 H( Runits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
4 L) R' k0 _2 ~. Y; eRegionally, we see the greatest strains on the Prairies,
8 v( P6 Q3 c7 Z: v, G+ 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
very time that the resale market has swung into strong
: l0 G9 L0 I7 \buyers’ territory. Homebuilding in the Atlantic provinces
" n: o1 M, `: K# S& s: _* yhas been relatively balanced but, while not plagued by structural
3 [' y2 n+ q/ o  Q5 Aweakness, will be singed by the downturn nonetheless.
- P: ?( H6 _0 t( U- tQuébec shows signs of strain – especially given the
& _& G3 e) y3 {, ~, m$ Hstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
, d& V6 c$ I: U, z& [, xgiven 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
& c& P# u' Q4 b8 S1 M& ^! R9 Jlimited – with the important exception of the Toronto
+ {7 }/ [* G9 F' J$ q7 ^6 |condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
1 f% o2 g% c% D1 ^construction mean that record numbers of condos will
+ g3 C; j( q; p  R# Breach completion during 2009. If absorption rates fall, as
1 W$ o2 R9 T4 B3 \2 _cyclical factors would indicate, condo inventories could
spike 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
1 {; Y/ x" q5 @1 `8 _6 Xyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
. b+ y0 e+ N: p; ^& s0 TOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
! L0 l9 e5 }, h4 N7 e/ |& C416-982-8063
Pascal Gauthier, Economist
- h* \- i" B* ]. E4 L; g, K416-944-5730
: l) j% r! D) P. ^
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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