TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- q: b! w2 z  v- h1 F; R% z* sfrom 2002 to 2008, unsustainable price increases drove
+ _& O+ `# i4 y7 Runsustainable levels of building. Our view is that house
$ R5 |, `2 ^4 I/ ]prices exceeded the value of housing that was justified by
; I' n# f- F5 v& Y8 tfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
. l5 Q  c$ f% ^12%, an excess that was exaggerated in the past
# p. a: [/ t6 S' fthree years.
; }5 h( t! I% l% C0 Y# _  ~: K7 Q0 hBy “overpricing” we mean that prices detached from
' U* `, l) [5 M8 e- n/ Ytheir 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
% v) z2 ]) R, X6 E1 yto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
; f$ N6 K1 s" \" n. h/ Pwhere homebuyers buy up too many houses and
" y) |$ @# b% Q" R8 U( J2 g3 E- qthat this demand cannot be sustained; and “supply-driven”
# e1 J! B) J+ zwhere builders accumulate excessive inventories. Although
( Z, Y. C1 [7 w4 s8 ?there is evidence of both types, we contend that Canada’s
5 `1 K6 H+ n6 r5 l“overbuilding” was mainly of the first type, where
/ [5 h  s" j* jhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While 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
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
' \) S6 _0 C3 Odampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
( @8 s( [& j$ i1 ?7 n: y/ qto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
0 u& ^9 w, L, X8 `2 [9 j125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
# t4 Z7 {/ ^. {% F' {fundamentals of house prices and housing starts in each
2 X- n) T" h% m$ p0 M  g% sprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
8 M: a$ U# b) s6 ?4 c( D3 z8 |long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
9 X# J- J# {6 @# [8 X2 h2 jTo examine the degree of overbuilding, we employ a
! Y3 @" c& U% I, R( V- |# o% B$ @" m“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
/ ~3 d# T* r" ufundamental-justified level by about 12%. Although new
( j1 J. ]5 q* S* f% ^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
+ C3 J/ _! F  w& _; b3 halready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
* G9 ]4 T3 q' M+ P4 ]buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
% |/ O# s" Z) Sweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
+ J, Z4 T2 j# g' c7 q+ Fstrange 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
rates. While Ontario homebuilding will reel from a
/ m+ h7 a- l% Z0 M: Tcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
5 c7 }. X, v, g' \7 o3 ]condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
) p9 o: V* @9 K6 B- yconstruction mean that record numbers of condos will
7 }- @! {" n2 ^. [reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
* e& t2 C. V  t7 R: Iresidential construction in B.C. will definitely droop, we
) N( ^# d- }: T3 @anticipate that the West Coast will continue to benefit from
7 Y" l" K/ ?4 z" e& j5 J/ O5 Jinter-provincial and international migration over the coming
! ?. \8 [9 x8 W) n8 pyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
0 U3 G! G. E* T) s5 K  MOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
. J' M3 }9 I. e* j- V. LGrant Bishop, Economist
416-982-8063
4 B1 h+ D. ]! u( R# }Pascal Gauthier, Economist
6 u& S: u4 _' M6 }1 K, ]0 C416-944-5730
, }1 w$ T1 ?4 q. N! b; r# x( F
: y" L( a& K& r* g9 l' U1 {) |http://www.td.com/economics/special/gb0409_housing_exec.pdf

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