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
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
# X! h% j% a9 ~* e12%, an excess that was exaggerated in the past
9 x+ U; M/ _8 othree years.
* k& W0 P% x1 a- i. ?By “overpricing” we mean that prices detached from
, w& L0 T; m' ^0 j4 Stheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
9 i5 s$ @5 h) f/ x" _6 dwhere homebuyers buy up too many houses and
! p' l' v& ~$ {, }that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
( Z# V7 J" B* o* Y; e* j! Dthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
8 [: q# w. N" Dhomebuyers 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
! G! F% |9 \9 Mon markets over the next few years. Even as Canada recovers
' S" Q# h9 z6 I3 H7 f4 C: R/ efrom the cyclical downturn, house price growth will
$ F1 p$ p+ q* ?% U6 Y$ n5 u7 ~remain choppy and new residential construction will be
7 F9 i' q" ~! ?( i( ?5 }dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
1 A" K9 Q! m8 {6 O+ n% Tto persist over 2009 to 2011. We anticipate that nationwide
8 R' }& w* X( rresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
$ m$ C% H+ N, W4 wTo 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
. I  S/ l) [; |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
, u* i% ^& R& J0 Eof residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
( J. v& Z' q7 w1 bwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
! f/ F" N1 @5 _8 xfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
$ F  C1 {9 t( g  S: f$ amany houses at prices that exceeded fundamentals.
& ?9 ?* F$ V; S; PRegionally, we see the greatest strains on the Prairies,
: ?( A' e! k" Q3 Dwhere housing demand will further contract under waning
1 P" F, l6 {  I4 }) ]population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
2 I$ r' K- E, Z2 svery time that the resale market has swung into strong
1 a' W, {2 B) ]0 ~  H( |6 |buyers’ territory. Homebuilding in the Atlantic provinces
1 s& [7 o$ R$ C- ]has been relatively balanced but, while not plagued by structural
. ]5 }% a9 b' ^( W- S3 h6 Xweakness, will be singed by the downturn nonetheless.
6 }1 l$ J$ i; _  s* b; r# J; aQuébec shows signs of strain – especially given the
0 q& L3 Y7 e- ~; [2 D$ L0 Ustrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
, @  y# k0 z0 p& z& i/ H/ {3 Cgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
& G8 v( d. ~1 d- j: U/ v* jcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
; J3 T3 ]! F+ k6 i& h# x' p8 Scondo market. Both in Toronto and Vancouver, historically
* e. {$ M; m+ k2 \high levels of apartment-style units presently under
7 L) V& a& p2 Dconstruction mean that record numbers of condos will
& Z3 Q+ U  }( l4 T: V/ m( v( yreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
' l+ T7 J+ k- [0 ?1 e' w, w. ]: Gspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
+ W' ?7 s- F9 ointer-provincial and international migration over the coming
years, which, along with improvements in affordability,
) i9 p+ _* }8 x9 U1 N0 D' `& Fwill alleviate some of the pressure from overbuilding.
6 d5 s1 E# l5 |; [0 GOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
/ k) g7 ?/ E9 Z% C* d# AGrant Bishop, Economist
9 F: U( g2 J, r416-982-8063
Pascal Gauthier, Economist
416-944-5730
3 v# h1 i, m1 D- k
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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