TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  k& \+ [% a& R1 L: Ufrom 2002 to 2008, unsustainable price increases drove
  d1 r2 D: A, F# w! `unsustainable levels of building. Our view is that house
8 q2 L) J7 a+ o4 Eprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
! K5 g, L+ L% W4 F2 U- }% v/ pthat exceeded its fundamental-justified level by approximately
( m9 }( Y$ h& j& l3 q12%, an excess that was exaggerated in the past
7 p' `, h0 c6 O5 @3 Tthree years.
% a  J5 J6 m9 D# C. G" I  j( ?By “overpricing” we mean that prices detached from
' p" O2 I# A( x  F5 ftheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
! u( z; V( X* vboth a cyclical downturn and a return of house prices
5 z7 R0 @. q  C0 _# D5 Z" l% [to fundamentally justified levels.
2 e5 J8 H$ R! s6 UWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
& W3 w; W  D9 jthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
5 c" i. x- U7 g) X( ^there is evidence of both types, we contend that Canada’s
4 z' D! |, K  T9 w“overbuilding” was mainly of the first type, where
( ?: @* U' M- t% H2 t/ ohomebuyers pushed homebuilding to an unsustainable pitch
# E& q! B2 y; q, Nthat is now being rapidly reined in.
" \% @/ s: x7 _  RWhile most markets won’t face U.S.-style overhangs,
- S8 L7 W, S* J$ S3 \the 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
dampened, owing to this structural weakness. Construction
, t2 o! y  O+ D  ]7 T8 U# L* Y% M( Jis now undershooting fundamentals and we expect this
- }% |8 ~0 z! U' G1 h. @) y" Rto 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
in the fourth quarter.
. P- B% n* s# \. P- K, ETo quantify the degree of overpricing and overbuilding,
; F- }' C8 t0 B  awe first develop an empirical model, based on long-run
) {/ s, ^& e0 b. ~; t4 T) r* A1 hfundamentals of house prices and housing starts in each
+ H0 U% _* Q; Lprovince. 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
) ~4 b0 i2 i  N3 yregard housing prices and household formation as the drivers
. c; A) A; g  B0 ]* k- kof residential construction.
To examine the degree of overbuilding, we employ a
! |4 a$ x) b/ \/ Z  V" b$ y  b“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
% _1 H( _) L0 M/ V/ B( ~) O( C' Wfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many 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
2 c0 |1 z* O( o, D4 O1 h# Q& K' K0 talready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
3 I$ c0 i- Y' J9 I5 hbuyers’ territory. Homebuilding in the Atlantic provinces
# r/ m" |1 s" f5 q8 K! Uhas been relatively balanced but, while not plagued by structural
! m8 ^, g/ ?: I8 {" g8 L( }8 |weakness, 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,
given the province’s history of under-building and low ownership
% Z" e0 S+ j. Z  Orates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
3 V, \/ }( i( K( X' Zlimited – with the important exception of the Toronto
% X6 }" x; j/ ~$ v3 g+ o1 D9 i# ncondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
; [4 T8 S8 p9 l8 v3 m$ U6 ^reach completion during 2009. If absorption rates fall, as
) ~  j! U  C. l, g$ [6 Dcyclical factors would indicate, condo inventories could
% R+ X( u; Y/ x" v' aspike severely – particularly in Vancouver. However, while
. b6 N# }* w" E; T/ Y9 }- Sresidential construction in B.C. will definitely droop, we
* i2 d9 x! y( v) tanticipate that the West Coast will continue to benefit from
7 \. t3 c. g# \3 a& Z1 M) b+ X5 r2 sinter-provincial and international migration over the coming
' O' L+ v" o( {8 x8 G$ ^/ d" f, zyears, which, along with improvements in affordability,
  `+ |9 N+ V& E8 Z7 Ewill alleviate some of the pressure from overbuilding.
+ e4 I- D6 g, i$ R' MOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! O+ l7 [& H: G9 EMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
0 H- c4 ?" [+ E- @7 T416-982-8063
Pascal Gauthier, Economist
- _! E, I. q# q8 T+ o+ O! D+ G8 u416-944-5730
1 r/ i' P0 F. x% }
3 J8 k  w$ q6 D9 \; Dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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