TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
5 m( c8 W% L) I4 Cfrom 2002 to 2008, unsustainable price increases drove
/ r0 W0 J+ l! lunsustainable levels of building. Our view is that house
! c. t. _1 r' gprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
8 v( W- v; ]  r6 ?/ [7 \0 g% O% f1 ?overpricing compelled a level of residential construction
0 }1 p$ ]6 ^5 A+ z* Fthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
7 s, E. X. v" _By “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.
9 |6 B3 y/ P5 _4 _: gWe consider “overbuilding” of two forms: “demanddriven”
, L* `* ?* l0 V# V& m# nwhere homebuyers buy up too many houses and
1 L0 J$ @+ Z' G  o; ithat 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
6 A( g; f- G' x' m( h“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
' H: J  r' J6 z5 ?( I- ?4 s) [that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
5 N7 ]9 q+ Y4 h8 g5 ^: N& mthe construction of too many new homes over the boom
; I# T0 {) G. p" Nmeans a deepened slump. This overbuilding will likely weigh
; s8 W7 G$ E  t: j. a7 m7 fon markets over the next few years. Even as Canada recovers
/ H  _* @2 n4 z3 u0 Gfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
' c8 }& h% S2 M) `: m1 presidential construction will fall further to around
& M- ?) J+ f! `2 z" P. q125,000 starts over 2009 with a trough around 115,000 units
" r+ h; l1 @8 t7 Pin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
. m8 X4 m8 r# }" c& rwe first develop an empirical model, based on long-run
+ d! h' C3 q7 b3 ^* ^3 l; d/ ffundamentals of house prices and housing starts in each
% X7 |5 \3 B8 R2 oprovince. Affordability is the key concept behind home
3 w* x& C; s4 F# Fvalues 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.
8 {+ m* n. l$ fTo examine the degree of overbuilding, we employ a
& B  z) o& E6 L7 |“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
* d3 ?5 _9 t  f* \9 poptimally. We find that actual homebuilding exceeded this
( p! Y2 z; B7 o$ z% afundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
9 Y2 \" i1 u" Vmany houses at prices that exceeded fundamentals.
! V- l& ~: b- T) ZRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
) w. b0 i" X6 X0 V. ^. u- S3 s6 s" Jalready witnessing surges in their unsold new homes at the
2 d; q3 _1 ^  U. B$ B$ Svery time that the resale market has swung into strong
2 f5 J$ Z/ U9 ]% X5 t9 a1 M% Obuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
; ^6 t& f2 S$ U* S! x6 n2 [3 I3 yweakness, will be singed by the downturn nonetheless.
2 d3 g3 {1 i6 B9 m' h! q8 TQuébec shows signs of strain – especially given the
. Y) ?- i. h- Bstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
# i6 n& J9 [$ R% o1 [7 t; O- ngiven the province’s history of under-building and low ownership
5 R6 o# n, O0 ]5 Brates. While Ontario homebuilding will reel from a
, E! H4 D, `; lcyclical downturn, the degree of structural weakness appears
8 O3 l3 V. s" Z* m6 v- llimited – with the important exception of the Toronto
5 n3 t2 M5 t! m7 o8 ]condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
0 U& [/ u3 f( X3 X$ x; Q, w) ~construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
2 I' b& N6 {  w# v& e# ospike severely – particularly in Vancouver. However, while
8 Z5 F) y0 b; b2 M# J: ?' qresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
1 g( S8 m$ j4 j' cinter-provincial and international migration over the coming
) N  V0 `3 K" t5 ?4 w0 Ayears, which, along with improvements in affordability,
8 i, }/ O. Q0 hwill alleviate some of the pressure from overbuilding.
0 P0 j4 m! U/ F2 w8 Q0 IOVERPRICED AND OVERBUILT: CANADIAN HOUSING
1 I9 }& P7 \* F2 K" G4 W% oMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
/ b0 Q7 v6 g/ P416-982-8063
Pascal Gauthier, Economist
0 w" J4 T( i' {/ `8 p6 |( |+ K416-944-5730

" t) c/ v9 s& p  \& Ghttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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