TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) d# }+ r$ X3 L) F6 Z, F5 }3 ~from 2002 to 2008, unsustainable price increases drove
8 z8 u2 }' ^  H1 k" W  vunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
& z: h% w$ \0 v- A7 woverpricing 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.
! L3 b/ q/ w' I6 z+ cBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
; d& y# N3 o1 |' V! Taffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
/ E4 K& N9 ~  y7 U9 E( @+ `to fundamentally justified levels.
6 x1 R+ C* M/ B4 S: S, M3 }We consider “overbuilding” of two forms: “demanddriven”
1 k6 ~6 r3 p' kwhere 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
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
  O3 G* W& v! ]. E: athat is now being rapidly reined in.
: ^0 Z  O+ O4 i& gWhile most markets won’t face U.S.-style overhangs,
  `9 j3 b2 a7 K; }! Ithe 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
. Q* Y( u) k* ~; X, qfrom 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
% y1 m3 ^/ Z6 gto persist over 2009 to 2011. We anticipate that nationwide
' T, F9 D" L' h# j, ~residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
5 x+ c6 O) @' O! q7 z( b: s2 G. Uwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
8 I% ]6 v. t* ~9 R6 pprovince. Affordability is the key concept behind home
* I7 m2 @, q" X' }8 Xvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
( K  h7 k& @: i) Kregard housing prices and household formation as the drivers
+ F- g5 M1 [, ^* Z- @of residential construction.
* G( l9 {( x. v2 w& LTo examine the degree of overbuilding, we employ a
/ K3 ?4 [/ E$ u: }; x“counter-factual,” asking what level of residential construction
4 y; D/ E! d; Qwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
$ Q; P) F! ?% G7 A0 O9 Ffundamental-justified level by about 12%. Although new
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
0 o4 I; _+ n$ N  `4 Apopulation inflows. Saskatoon, Calgary and Edmonton are
8 m# Y+ x0 s: N3 ^& ialready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
4 `1 `8 E: V% d( N1 |0 n3 @0 shas been relatively balanced but, while not plagued by structural
' ~* ]+ p- O& ^: Bweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
; G/ \* Y! T2 Sstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
) s* A3 i9 @9 ]' Ygiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
* Z2 L8 B& U. Y+ S3 W  R+ v- qcyclical downturn, the degree of structural weakness appears
' _  X+ D, t2 ?1 q. |6 {2 slimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
7 ~6 J* M3 W4 g2 L9 E: Z7 Uconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
) i/ s+ r$ ^( Q7 y/ O; `residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
5 U; F, Y6 ]8 _" ^inter-provincial and international migration over the coming
% {5 I" y0 q2 I8 v4 g* Dyears, which, along with improvements in affordability,
6 _6 ^* K8 j( [, ]0 y9 }$ A5 Pwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
% a. p$ a( o% oPascal Gauthier, Economist
3 H& [7 _* d) V0 h% l416-944-5730
) a1 L4 F, X1 k! y* R& k
, C4 g3 `4 s/ W' C. l" Phttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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