TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
9 B1 Z% Q' B+ kfrom 2002 to 2008, unsustainable price increases drove
( ~# W% I! _. O/ A" m- yunsustainable levels of building. Our view is that house
9 G- b- a" g5 _( s' ^' E! hprices exceeded the value of housing that was justified by
8 c8 X% K& K/ D6 d8 p# ]: hfundamentals by approximately 9% nationwide. This
6 k. F( C! [  }$ _overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
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
* J5 l8 r  p4 t2 V7 `2 W8 ^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
+ h  n1 F* f/ n“overbuilding” was mainly of the first type, where
5 h$ ~7 H9 `5 T* k/ P8 Yhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
5 a4 @8 U! ?+ C8 o1 uWhile 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
8 I# m0 g; p6 `# N$ Ron markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
1 ^8 Z8 V6 ?9 T+ wremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
4 ]: u+ i# K( jis now undershooting fundamentals and we expect this
  K  _9 e! K/ u8 L: \to persist over 2009 to 2011. We anticipate that nationwide
" ?; l( g8 ?) {residential construction will fall further to around
8 t# R9 Z- [3 |125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
5 i) `; J( Q/ X2 R' ITo quantify the degree of overpricing and overbuilding,
1 o( w& d5 O4 O$ B: H9 W! V' xwe 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
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
8 Z. m+ w) l, j( M6 z# zof residential construction.
To examine the degree of overbuilding, we employ a
) [$ W# _0 D9 {8 q“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
, V1 ?2 _: Q9 eunits were being absorbed, homebuyers simply bought too
/ ]+ T5 K2 \8 T2 ^3 ]5 n% q1 B: Nmany 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
8 X, D/ Y) l# f% G6 @already witnessing surges in their unsold new homes at the
1 _3 |/ B, T& b3 Fvery time that the resale market has swung into strong
/ h$ p7 C" u$ O/ B8 Tbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
! \4 r2 E6 {/ x7 I* i* Y  wQuébec shows signs of strain – especially given the
0 E4 F; _" r: w4 y1 tstrange accumulation of unabsorbed multiples on l’Île de
4 }$ H5 c6 V# T  wMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
$ [! j) F9 R/ W& Arates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
7 J/ v5 m2 i- \" {% r5 klimited – with the important exception of the Toronto
' _: Q7 i4 K& ^5 Y2 E4 p- l. qcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
1 j/ u" l/ @* v# [0 W8 t; i. V2 r& Gspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
3 f" F. w( [* Wanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
6 n" V+ L- F+ y$ e; H; H. _9 s( pwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
  I1 y% n8 A( c. c: UGrant Bishop, Economist
416-982-8063
7 L8 P0 @* R! z+ ]" q- fPascal Gauthier, Economist
4 w/ v; g( H1 }. ~4 B, V416-944-5730

' i2 {9 ?, X' F4 X$ x0 ?5 rhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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