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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly; `& N  d  g/ E" M
from 2002 to 2008, unsustainable price increases drove+ r0 X* M0 C* w9 S% G
unsustainable levels of building. Our view is that house
* X% J& [) S) Y4 I7 Jprices exceeded the value of housing that was justified by
( c/ e. I2 ?4 x' g& ofundamentals by approximately 9% nationwide. This1 H1 c# L& U; r: c8 C! W
overpricing compelled a level of residential construction/ g2 h% b8 z4 E+ i4 V& m% f# [1 g
that exceeded its fundamental-justified level by approximately) X3 C3 u5 J4 Y. `
12%, an excess that was exaggerated in the past, r1 `% H5 q1 U/ P# p5 s
three years.
6 E  s+ g5 A& f, k' kBy “overpricing” we mean that prices detached from
7 K- a' R6 A' H5 p; C' b% t8 Jtheir fundamentals, as witnessed by a steep erosion of
9 S! A! J% P9 S) ~0 v) k$ d2 Kaffordability. The current unwinding of house prices reflects2 A, x( l0 C8 F8 N- S
both a cyclical downturn and a return of house prices6 J% b. I/ w9 m3 x
to fundamentally justified levels.
% I8 k$ y" D, M; qWe consider “overbuilding” of two forms: “demanddriven”
9 k: k' ~9 ~3 a9 c: Pwhere homebuyers buy up too many houses and- K* ?. S+ e* J% U& b$ i' s6 E% ]
that this demand cannot be sustained; and “supply-driven”/ Z8 o, A6 Q# R% f& `' y' ?" M
where builders accumulate excessive inventories. Although
0 q+ Y2 n1 S9 F1 n( M( Kthere is evidence of both types, we contend that Canada’s
& t. b; G: t$ G1 g4 h“overbuilding” was mainly of the first type, where
5 k5 U9 l6 C/ f6 w; I9 q$ Chomebuyers pushed homebuilding to an unsustainable pitch
4 d& E0 J( i  T6 w% \that is now being rapidly reined in.+ |" N3 m1 n+ l0 `
While most markets won’t face U.S.-style overhangs,& ^" K, ?5 F( ]7 }
the construction of too many new homes over the boom
' C* w$ P9 t( m" r# C* a  \* g, xmeans a deepened slump. This overbuilding will likely weigh
# ?7 `! P3 i9 R- }* |7 Y: k! Xon markets over the next few years. Even as Canada recovers& @! Z4 h) U7 b
from the cyclical downturn, house price growth will. F0 x7 R# z$ t) S0 q) {
remain choppy and new residential construction will be' S% T( G9 m& }! S; O7 M; O
dampened, owing to this structural weakness. Construction  V! q2 F6 Y' q/ A% J
is now undershooting fundamentals and we expect this
* @& o* E4 G; d1 I9 w6 Hto persist over 2009 to 2011. We anticipate that nationwide
( Z) H  T6 d* d6 @+ [residential construction will fall further to around
' }) G. q0 r5 k( g) C125,000 starts over 2009 with a trough around 115,000 units" K6 n8 ]6 M! A  G
in the fourth quarter.4 @0 J/ B1 J2 R+ P+ s( D: [
To quantify the degree of overpricing and overbuilding,
$ ]& s4 B6 \7 Z. ~% Zwe first develop an empirical model, based on long-run
$ R# n( V5 Y* N/ ?fundamentals of house prices and housing starts in each
! u0 m- `' m3 w4 Sprovince. Affordability is the key concept behind home1 m' Q- v  a, a8 C, v8 W/ Q
values since house prices should track incomes over the
4 D8 e0 @  s9 z3 |( a2 j$ q* _5 slong-run. Since homebuilders build to meet demand, we5 F; S% D; f( m; m/ e- @& t5 M7 o
regard housing prices and household formation as the drivers' k9 s3 C1 A0 w8 E) r
of residential construction.+ U# K5 o, P0 O# P. D0 r0 Q" M
To examine the degree of overbuilding, we employ a
, l- x% K' f' c) t- b) R" a“counter-factual,” asking what level of residential construction- ?8 V9 r( m2 z- n
would have occurred if housing had been priced
. y3 m# S4 I$ }& g' [* f. doptimally. We find that actual homebuilding exceeded this
# l: P- g& y; q4 F. n8 hfundamental-justified level by about 12%. Although new9 R& O# O! }3 G9 `1 n" M
units were being absorbed, homebuyers simply bought too
; y$ H" J/ |" r0 X9 H* H# amany houses at prices that exceeded fundamentals.# c9 i$ Z+ H# ?. u5 x; S4 p
Regionally, we see the greatest strains on the Prairies,1 b% D; N0 A4 y5 j
where housing demand will further contract under waning/ H+ G4 W0 q5 @5 V- X" @  Q, F5 j/ u
population inflows. Saskatoon, Calgary and Edmonton are3 R( u. W! [* I6 J4 X7 w* L/ Q
already witnessing surges in their unsold new homes at the3 Z' ^4 t( W8 Z2 u, D$ m
very time that the resale market has swung into strong7 t& _& X6 G1 D3 W, `8 J
buyers’ territory. Homebuilding in the Atlantic provinces# @1 Q( A$ R5 R7 [
has been relatively balanced but, while not plagued by structural
& i$ t8 e( N5 d6 ~weakness, will be singed by the downturn nonetheless.) P  |0 S" b) a7 o" w6 G) ^6 N8 N, g% L
Québec shows signs of strain – especially given the
: M/ g/ e+ N3 d# ~. e! f" D' kstrange accumulation of unabsorbed multiples on l’Île de7 _8 O6 u* F+ n" ?1 Z: e
Montréal – but recent building has been relatively balanced,/ ?: ~: n& q/ i3 `8 y" ~
given the province’s history of under-building and low ownership- R' ?! }6 G: n& `) \0 ]- \$ R* p
rates. While Ontario homebuilding will reel from a8 k' F1 H9 r) F$ P! S5 ]0 C/ _0 f
cyclical downturn, the degree of structural weakness appears7 u- E( Y3 B) d, o; V: x
limited – with the important exception of the Toronto3 S: v) S" i, B& A( ~% h8 R- w1 E
condo market. Both in Toronto and Vancouver, historically
* U3 s  K2 X( k* Zhigh levels of apartment-style units presently under" S, X- R/ }7 v* q& n2 T
construction mean that record numbers of condos will
/ Q$ `" t5 r" P  g8 @% creach completion during 2009. If absorption rates fall, as0 ^& J: J! ]% t, ?) {
cyclical factors would indicate, condo inventories could3 T( h3 e# C1 m7 w" H
spike severely – particularly in Vancouver. However, while. @( g4 [) ?. A
residential construction in B.C. will definitely droop, we: Y7 o  p2 x6 M# i: X
anticipate that the West Coast will continue to benefit from
( q3 ^0 \, ]4 `# ^0 [- Cinter-provincial and international migration over the coming2 R+ x+ M# q: x$ B, X) J
years, which, along with improvements in affordability,
- D! g2 |. V3 B) a1 P! m& ]6 Lwill alleviate some of the pressure from overbuilding.
; d) z7 M  j  [2 {+ j2 K# h4 bOVERPRICED AND OVERBUILT: CANADIAN HOUSING  G! i) W( g# `' P0 R8 a* `
MARKET RETURNS TO FUNDAMENTALS
7 m, y% }. j; J" m  GGrant Bishop, Economist9 l6 [0 h  |: t9 `% C6 o
416-982-8063" w5 A, Q; r9 s4 T3 I# D/ G
Pascal Gauthier, Economist
9 l5 I9 h* B4 {( G9 w+ u416-944-5730+ n' k, h7 P4 O9 Q2 h

/ z+ J; k7 l; }' d  Ehttp://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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