TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
$ x* B' `& Z8 G+ H$ U1 k/ @0 J& rfrom 2002 to 2008, unsustainable price increases drove
+ K! b3 o8 U# P" o6 j, Bunsustainable levels of building. Our view is that house
+ V/ z4 `+ n. s& q/ `$ gprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
3 t6 m# v2 W9 qoverpricing 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
8 l$ |% W+ J# y: ctheir fundamentals, as witnessed by a steep erosion of
3 j# m7 D8 T7 qaffordability. The current unwinding of house prices reflects
" A- G& ^5 J# j4 [* Eboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
7 K, d& n* V/ X1 Zwhere 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
" Q& x) R  x2 w1 @: e“overbuilding” was mainly of the first type, where
6 _( u1 P! l( Y& Z# S9 Phomebuyers pushed homebuilding to an unsustainable pitch
0 F7 F/ {8 s9 M" B& tthat 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
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
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
$ Q5 Q# u2 g) `% O+ Q& q  eTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
5 S0 m9 j% G9 d7 Z# N% xfundamentals of house prices and housing starts in each
3 w/ _+ E: I* y. F, Mprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
9 I$ F0 d# _$ y: f: |long-run. Since homebuilders build to meet demand, we
2 s& }* a+ d) W0 b" H9 U) B0 aregard housing prices and household formation as the drivers
of residential construction.
# K' X9 T9 v* f/ ^. M! kTo examine the degree of overbuilding, we employ a
! b5 e5 J" Q! C- |“counter-factual,” asking what level of residential construction
8 m( \3 ]; R4 f& b3 X: i# W1 lwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
. o9 m' c6 h/ d! t1 Kunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
4 [/ m( f  G) }1 V# e9 }5 _" W- tRegionally, we see the greatest strains on the Prairies,
1 q7 ?% i, ~, D" ?+ c# uwhere housing demand will further contract under waning
: m7 w5 K* T" p7 g' }* n; H: ?population inflows. Saskatoon, Calgary and Edmonton are
$ r* F# A4 ]& y7 A* y1 ]% R" v- R1 talready witnessing surges in their unsold new homes at the
; q. n* Z) R0 [1 fvery time that the resale market has swung into strong
' c, z6 Q) C& l- C1 Lbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
( z3 s6 q: x% ~% [8 H* p7 RQuébec shows signs of strain – especially given the
% `7 B; c1 L$ ~# ustrange accumulation of unabsorbed multiples on l’Île de
+ p$ A, N+ S  gMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
# J" D/ V8 |9 J: o5 arates. While Ontario homebuilding will reel from a
0 @5 L) i" Y4 s5 D. j  E* F7 ncyclical downturn, the degree of structural weakness appears
. `' w! g( J3 q3 ulimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
. V" Y9 f4 F+ Y& h2 [high levels of apartment-style units presently under
% x' Q# j! {8 C9 S" \construction mean that record numbers of condos will
0 l  D( \- `4 _6 E$ L- n6 vreach completion during 2009. If absorption rates fall, as
- u; D0 [+ _: I5 j. J: Ycyclical factors would indicate, condo inventories could
1 C, b/ h; O3 W( e. q- X9 ^spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
3 H4 n! W# n! V! V8 Nanticipate that the West Coast will continue to benefit from
) V/ _2 }) C# d" I- w- Cinter-provincial and international migration over the coming
/ ^8 S- v& x# @! X" Cyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
) {$ ]9 u- d$ H: @: w  S& hOVERPRICED AND OVERBUILT: CANADIAN HOUSING
7 x! A( ?* e9 h, z' ]* yMARKET RETURNS TO FUNDAMENTALS
( ]2 {/ r( v( V- AGrant Bishop, Economist
' p' _- _6 l( S+ a9 E5 B416-982-8063
2 f, y+ d$ t4 M% c# A" {& mPascal Gauthier, Economist
' f' d7 L# Q& M( P416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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