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
7 P* ?) p  y# I4 c2 `fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
: A1 b- W, D4 T; Z3 i$ T  l12%, 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
( k7 X. i/ d; W+ Y* wboth a cyclical downturn and a return of house prices
) p$ [; u; K) r7 z4 T" b/ K) c; oto fundamentally justified levels.
- |/ B/ C, e: c6 g9 IWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
) _( M8 ]* o* a* Lthat this demand cannot be sustained; and “supply-driven”
; T% q( h( O% c! l, ewhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
. K# O) h6 M5 j8 `& t$ U7 g) X“overbuilding” was mainly of the first type, where
% ?' K4 p$ W% b7 G; F7 hhomebuyers pushed homebuilding to an unsustainable pitch
4 o: V5 _& m; ythat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
: g. u9 k- _' r8 x$ zthe 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
. Z9 g8 ~0 \! `dampened, owing to this structural weakness. Construction
4 J4 r) i) @8 M8 k5 {2 C: nis 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
) ]& @7 T; o$ [- K+ lin the fourth quarter.
* G7 R& D5 \0 _- x: }To quantify the degree of overpricing and overbuilding,
+ C8 `, d! I$ lwe first develop an empirical model, based on long-run
" z' x" y. [3 M- d0 p# |/ |/ Sfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
" n+ g9 T1 z8 `. Dvalues since house prices should track incomes over the
' v7 n' G  {$ P7 `% b2 P' zlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
- m( ?$ m4 ?/ [4 Fof residential construction.
. |0 `! t* I% x5 q$ x* \3 iTo examine the degree of overbuilding, we employ a
3 a. _! n' [7 U0 |0 T“counter-factual,” asking what level of residential construction
% A' b) t' Q4 A2 W2 ]would have occurred if housing had been priced
- X9 x2 c3 m& n5 g5 J& d+ T) r+ c9 boptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
/ C1 {$ _" [) @0 Cmany houses at prices that exceeded fundamentals.
5 `- o( s1 @6 z1 w! VRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
0 g. J# m# d) `7 U$ h) I2 Jpopulation inflows. Saskatoon, Calgary and Edmonton are
( D: v# a4 X/ o# g. Oalready 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
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
9 d* L2 f# f6 E% W/ dQuébec 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
: w8 o8 A& G" r5 |2 y* ]" P& zcyclical downturn, the degree of structural weakness appears
5 h. v: A7 ~5 t/ Z+ Y- zlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
0 q! a9 v, a5 E6 F- {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
. Y2 Z7 T1 U% ecyclical factors would indicate, condo inventories could
! p9 O, y( |8 q$ fspike severely – particularly in Vancouver. However, while
, |1 E# I$ w/ m4 h( `7 P0 cresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
6 V- [# L0 {* G; K& \7 yinter-provincial and international migration over the coming
! u8 s+ u" b/ f3 z6 Cyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
; V; E# o: Y6 l' ^8 W" a% xMARKET RETURNS TO FUNDAMENTALS
; ?2 X: H5 h1 x6 N5 R/ V( rGrant Bishop, Economist
416-982-8063
; s" o3 t- N' F0 N3 `5 zPascal Gauthier, Economist
416-944-5730

7 I+ w( h* Y9 K- @. F- mhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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