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
9 ~" v" I  e+ `/ N' n% \! Y  O5 Dunsustainable levels of building. Our view is that house
; Q  u; \$ V0 }& z( }' @/ O( cprices exceeded the value of housing that was justified by
: X: @" C; k9 b! Wfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
" C  n7 ]% y5 ~) `9 \( ~that exceeded its fundamental-justified level by approximately
- r0 t- q! V9 f4 N8 p  C& r- ^12%, an excess that was exaggerated in the past
three years.
6 P$ A) B6 v$ d( h3 p! n  A5 w5 X9 fBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
) l6 D* P  E9 R& Qthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
+ V9 J/ b" p. x% w7 ythe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
$ s$ \) Y, A2 o* _remain choppy and new residential construction will be
; u' n- z9 g6 E1 g) v+ @& Z* Zdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
: _4 b  d/ r1 v# _- f. pto persist over 2009 to 2011. We anticipate that nationwide
% d. \0 `/ u$ T1 kresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
# D# u7 z0 s+ P* I! t  u# Xin the fourth quarter.
9 [0 g7 z8 B. z( e" ]# j' WTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
0 ]" F% Q% H" Z4 ?- 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
regard housing prices and household formation as the drivers
of residential construction.
1 g! G5 E3 y. O. a4 E  S5 KTo examine the degree of overbuilding, we employ a
4 z% r& u& c+ u“counter-factual,” asking what level of residential construction
8 `" ~( N9 e$ M5 a  d( zwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
, L& B7 k7 E4 Y% z7 S9 W% Q% Yunits 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
/ x, ~9 p8 |2 y4 ]9 \already witnessing surges in their unsold new homes at the
( e2 F5 f( M; F% V/ mvery time that the resale market has swung into strong
# s6 M5 g5 z% i% f8 `% ybuyers’ territory. Homebuilding in the Atlantic provinces
( R2 \4 ~: T& U( ]+ W. b: }has been relatively balanced but, while not plagued by structural
. ^' t* L" h; c5 p8 G& {7 C/ iweakness, will be singed by the downturn nonetheless.
: ?8 v9 W* w& e; {6 zQuébec shows signs of strain – especially given the
2 S" X1 R+ C3 V* V/ F" Mstrange accumulation of unabsorbed multiples on l’Île de
+ s# E' j5 ^5 ]5 Q2 j" j' `' v( [Montréal – but recent building has been relatively balanced,
, S2 T2 m5 Z$ Cgiven the province’s history of under-building and low ownership
1 ]' f5 I. o" o$ t# Y, G( qrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
0 Q4 j0 H4 C% D- slimited – with the important exception of the Toronto
8 b& `, x0 s' w& y' K* f& E" {1 \, Zcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
8 W# |5 o8 X1 q% E0 p7 f) b4 @! dconstruction mean that record numbers of condos will
& H# J, O& {" i7 M6 R) S, freach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
- ]+ z2 g: Y0 e/ Hresidential construction in B.C. will definitely droop, we
, x8 A) m. T7 G! z2 i, Uanticipate that the West Coast will continue to benefit from
% y% n/ @% M! _+ ]7 e# m$ b2 Rinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
" r* R3 e; L3 f0 r5 q3 c416-982-8063
Pascal Gauthier, Economist
5 ^$ A" z0 L# o9 N! j416-944-5730
5 a) U8 o; S1 p1 G" a8 Q
- K! h( w& y* h+ T; `! a) bhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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