TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
! R$ R; g% s3 w' h/ `+ j% s- @4 C* h# k( Ufrom 2002 to 2008, unsustainable price increases drove
1 p, a8 q; w- junsustainable levels of building. Our view is that house
/ D; \; p) E! M$ u6 v/ Pprices exceeded the value of housing that was justified by
1 Y% [" h# Q+ x- k3 m! Afundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
: y5 T$ f1 B( G3 y7 B0 y  j8 m8 d4 Pthat exceeded its fundamental-justified level by approximately
4 \/ F& }& O. y7 Z12%, an excess that was exaggerated in the past
/ W% [! G! V8 i- W' V/ O4 q" {/ A( tthree years.
7 x, Q3 l: `* y; p9 N1 P) O* H! UBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
+ M: ~4 p  V  m  N& Haffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
6 \% A' w( J, |1 w9 U* |! {6 Dto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
% V9 ~/ g* s) mwhere builders accumulate excessive inventories. Although
( C. E: B; V2 C  V, ]there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
8 ~, Q0 B- b1 R/ n9 f; A% O9 O! Ehomebuyers pushed homebuilding to an unsustainable pitch
& c- W/ G% m$ W0 y+ D' r. zthat is now being rapidly reined in.
1 L/ ~& K. B% s( P# cWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
/ n, V: U6 \$ t& |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
* [7 q1 I5 T; T4 }: }1 S/ ydampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
0 a" X+ @" B/ i8 Sto 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.
; s* Y7 _  r, Z6 n8 C, @0 \& F& sTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
4 r6 Y3 H8 I" r. W: Rfundamentals 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
  _$ k. Y! k! `# i3 @6 H  z# N% p* zregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
0 C- J6 R8 H2 u; |% D“counter-factual,” asking what level of residential construction
6 b) r& u3 ?6 w$ w9 W9 K( ]would have occurred if housing had been priced
3 T4 J- {5 n- J1 }) x% N7 e3 Soptimally. We find that actual homebuilding exceeded this
% L: L1 @5 |8 \. B1 H; T: Y3 C! Z& Sfundamental-justified level by about 12%. Although new
0 |( G! X2 g9 d. U: Lunits were being absorbed, homebuyers simply bought too
' W: F  U6 q3 m5 i, u+ }. Kmany houses at prices that exceeded fundamentals.
5 n* t5 W& C: ?7 f5 @Regionally, we see the greatest strains on the Prairies,
! ?9 e) T0 b4 E! f4 n- iwhere 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
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- h" Q9 p( G$ H" }* cQuébec shows signs of strain – especially given the
$ J! S/ P  r5 r/ v  Vstrange accumulation of unabsorbed multiples on l’Île de
0 _( b- K" o) b& b  b& l# a2 rMontréal – but recent building has been relatively balanced,
' A* n& |% R% `( _given 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
1 D: T+ `" z1 F7 O; F* klimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
/ {4 W, }, n" F' Z: K5 Uhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
! n5 i$ b; f! l- k! t5 g- Sreach completion during 2009. If absorption rates fall, as
7 v& l: G3 |+ C& E/ hcyclical factors would indicate, condo inventories could
" w& g: A7 f% nspike severely – particularly in Vancouver. However, while
! O! D  o; e4 ?" B% \/ ], R* M/ J& Vresidential 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
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
- e8 u0 m  S" HOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
- u: ?& A" G- W# mPascal Gauthier, Economist
416-944-5730
5 N: ~  \+ B6 \& ~0 H2 d
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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