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
4 \2 `. c: B- h* W: A' ^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
1 l' V! ~5 l6 R3 toverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
$ d  B' D  W% n+ A, r/ `12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
their 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”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
, c' F) j1 y2 p+ D1 T5 Qwhere builders accumulate excessive inventories. Although
; x3 k) @* H6 A$ zthere is evidence of both types, we contend that Canada’s
1 t8 T6 P8 `) R/ a1 z! D$ H- j“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
4 Y, z# i$ h2 }While most markets won’t face U.S.-style overhangs,
' l" }9 j' \/ I: V. [) xthe 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
4 M% U) g% A3 \& j' x# \5 z" ]6 qfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
8 T& H# L- ~. T4 o- s: O5 Tdampened, owing to this structural weakness. Construction
' e; F  N% U, t: I1 iis now undershooting fundamentals and we expect this
6 h8 J( I% c+ y% u! ?8 Xto 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
5 Y2 c" r& y: g3 Q3 h( w$ o* X# win 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
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
of residential construction.
To examine the degree of overbuilding, we employ a
, ?6 Z* _3 F; X. J+ {! w& ~, o“counter-factual,” asking what level of residential construction
( H) \: {/ d& O& ^& g$ c# @- ?" Awould have occurred if housing had been priced
6 B; k: ?& j% Z' xoptimally. We find that actual homebuilding exceeded this
7 t  f8 i* V$ @4 K# U0 ]% rfundamental-justified level by about 12%. Although new
* |4 g/ P1 A' V9 V  hunits were being absorbed, homebuyers simply bought too
) p! e; r) X) y7 x( Vmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
+ h: V. [" o4 ~where housing demand will further contract under waning
; s/ d  g, T. }+ i1 _+ Gpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
6 e+ q& ~' U1 G% C) s9 U2 }very time that the resale market has swung into strong
3 u' r' M2 U9 H# [  X* Cbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
4 U3 M* E, e% p, T5 ~cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
! \+ z' m, c5 v- s0 Q$ `) vspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
+ _: \! o' F, o* j( c0 ]anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
; l- B9 w0 e: A% Q, _$ R* iyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
! G; Y- p7 ^; Z: y, SGrant Bishop, Economist
416-982-8063
# r4 U0 L, ~; p: @" ^. Q' `: rPascal Gauthier, Economist
7 T8 e* k; d) E) n  V2 ]: `416-944-5730
4 T+ {( x$ p& ^, M& \
+ f0 H5 G2 _8 p6 C9 bhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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