TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
1 ~7 d- l( i2 V9 `2 dprices exceeded the value of housing that was justified by
8 Q0 c6 s/ H) ~fundamentals by approximately 9% nationwide. This
( O) b; V4 ^5 P3 voverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
/ {! \& ?4 ]# {( b5 i12%, an excess that was exaggerated in the past
three years.
% @7 O2 {1 `# ~( f3 o# B" [By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
7 a% C( |" t% X2 ^/ P/ K; A. Vaffordability. The current unwinding of house prices reflects
% l1 U* Y3 x) k) W3 Sboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
5 h  V: m, ~$ ^) X1 D6 k& B6 |We consider “overbuilding” of two forms: “demanddriven”
' u$ m- X/ q0 f* Rwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
9 |* o- ]+ J- V/ l# twhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
/ q1 |% J8 O8 B9 R% l“overbuilding” was mainly of the first type, where
4 u. X( R, m. r$ V$ r, q8 Qhomebuyers 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
* H; k3 W# O9 v3 t  qon 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
' G  C6 g+ L! u9 j8 S! }" Udampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
0 \9 K0 p2 J+ o/ a5 q- m/ ~residential construction will fall further to around
- Y$ N" N1 v' o" L125,000 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
fundamentals of house prices and housing starts in each
6 N9 P( C; [+ t  {province. Affordability is the key concept behind home
: I+ ^+ o+ n$ Q9 R0 R1 |3 r( d' _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
, _- ~: v, w4 C! ~of residential construction.
To examine the degree of overbuilding, we employ a
; t7 n, @+ c& S+ O" c  U4 B“counter-factual,” asking what level of residential construction
1 ?5 r6 u' _4 S& A3 ~; awould have occurred if housing had been priced
. X2 N$ t4 A8 Y' w* T* x# k% foptimally. We find that actual homebuilding exceeded this
fundamental-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,
$ G/ H; K( R! C8 b& H' A3 y0 owhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
. M8 c/ q: z  r) v( g( W( _already witnessing surges in their unsold new homes at the
. R) @4 Z# H) |1 zvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
* j" o/ L8 `# x# J- J) t6 r9 g3 Rhas been relatively balanced but, while not plagued by structural
) q$ B: n; g. t" F6 r  e- ?2 u6 q* vweakness, will be singed by the downturn nonetheless.
1 O$ C+ [7 Y% D3 `% x3 \Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
0 Z7 y0 Z0 x" J& z/ O" |6 NMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
- ~. B* I0 E7 H7 v( Z) }! A5 S- Brates. While Ontario homebuilding will reel from a
9 H5 g+ ?% m: F5 Ycyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
% ]5 a* t/ d0 x1 M7 E- ~( v/ G7 v- ucondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
, u5 R2 C4 H+ \& [) _reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
! m, f; f6 s; o! @7 sspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
9 T$ P$ h1 X$ q2 g( Zanticipate that the West Coast will continue to benefit from
! s- t& L2 f1 R" `5 h5 ~inter-provincial and international migration over the coming
& L; `. j0 ?3 X5 b  H, T# kyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
  y! z" g* T& ?OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
- \7 ]6 _! ]) p6 K5 |, R' @Grant Bishop, Economist
0 g4 @/ @& |4 k416-982-8063
! ]5 z* h0 l' e# k: ?, s1 p" t- jPascal Gauthier, Economist
416-944-5730
  H" Q: ]* {) R$ Y) _$ a+ b
! U  g$ E- z. g0 C/ jhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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