TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
9 k/ S3 n% u( e$ q3 ^  @0 ~from 2002 to 2008, unsustainable price increases drove
* V% ]& d- R" B2 w8 @9 ~unsustainable levels of building. Our view is that house
3 j, f6 A& K6 ^% W: l* J. f, _prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
2 l! B0 Z; [4 Q; koverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
7 x8 ]: }( L  N! X2 j12%, an excess that was exaggerated in the past
+ K4 |$ E. {- v- i9 xthree years.
' D5 S9 Q4 Q. G6 V5 _By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
8 Q4 m- N  {- r! a7 S9 Uaffordability. 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”
0 ?7 X2 G/ ^8 }- ?where homebuyers buy up too many houses and
" g, r" D( _! Y: x5 n  O& T- [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
that is now being rapidly reined in.
$ W0 O' b- _- H# `% ?While most markets won’t face U.S.-style overhangs,
6 Z3 h" F+ d  y2 othe construction of too many new homes over the boom
" k4 p2 j& E- \9 A# c6 pmeans a deepened slump. This overbuilding will likely weigh
5 x5 ]! ^2 b8 p7 R; P0 C) [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
& x' X- [$ S; r% J" Y, j2 [( k# vdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
& C* U0 M+ }$ M' M2 y+ Wresidential construction will fall further to around
; r( L( f" }  V' W125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
* h; Z3 v  |3 C  R, RTo quantify the degree of overpricing and overbuilding,
+ A& E2 C6 `: K( F1 L1 L- w: w+ |) rwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
# _+ j( h9 K" j. avalues since house prices should track incomes over the
( H" P% }. ^8 u" X5 O! glong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
) x& X7 P9 e  p- Q" o3 V! \To examine the degree of overbuilding, we employ a
( T; v2 H  \2 L$ B8 y7 x“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
; C7 V/ J2 I8 r6 r( w. \fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
5 p! d; T' I, ~6 p( `# E& ]Regionally, we see the greatest strains on the Prairies,
* i/ p# D" ^0 d* m/ D; mwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
8 Y7 R+ U) y0 z6 u5 k: E8 Ealready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
* t' h9 g( N1 D' a% b4 l' Ibuyers’ territory. Homebuilding in the Atlantic provinces
8 N' N3 @- b6 x" Zhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- @, }& h) S& [. W+ E+ o# IQuébec shows signs of strain – especially given the
8 c  u0 u% l) ]3 c; s# Qstrange accumulation of unabsorbed multiples on l’Île de
% T) ~- |6 B* {9 n( rMontréal – but recent building has been relatively balanced,
. V% U: h- D5 n# y6 K8 Sgiven the province’s history of under-building and low ownership
/ Y! F8 y4 o* F: x4 d0 {rates. While Ontario homebuilding will reel from a
) a; i5 ?& q4 W: `, zcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
' {8 d6 Y6 n2 b0 q+ Q, Z1 E( p/ g+ Xcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
5 H. F+ m& c- ^construction mean that record numbers of condos will
6 m3 o; [  L$ q5 i( T+ vreach completion during 2009. If absorption rates fall, as
) o9 r: U# N$ i$ {cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
- k6 g( `# P7 }$ C7 Rresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
2 {1 i6 C& P3 k& D1 tinter-provincial and international migration over the coming
7 t) i1 d8 E- I1 P/ Y7 A1 V& F- s- c9 Myears, which, along with improvements in affordability,
; N+ t$ b" l7 y9 e$ Dwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
5 }/ W/ Z5 m0 R1 C7 |5 [& ]' m6 R1 vMARKET RETURNS TO FUNDAMENTALS
7 w9 e, c, s0 H( `+ T7 Z1 t& `8 [3 BGrant Bishop, Economist
+ f. W9 e7 L% y- }: b" h416-982-8063
Pascal Gauthier, Economist
5 l* H3 Z/ O9 S3 f416-944-5730
, ^* y* I& U; v8 k8 N9 {. ?& ]$ A
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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