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
1 N! v- m% B8 |that exceeded its fundamental-justified level by approximately
2 D7 J1 M4 y. |! c7 K12%, 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
: Y# N' ~4 }6 x/ C! Kto fundamentally justified levels.
6 ~3 \  M: g0 mWe consider “overbuilding” of two forms: “demanddriven”
7 j7 k) z5 D( t! Z( hwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
: y$ `4 Z3 k* V& w0 J6 b5 ?where builders accumulate excessive inventories. Although
5 j! E$ L6 z/ I/ Xthere is evidence of both types, we contend that Canada’s
" E, ^7 K6 {- ~- {4 \) x“overbuilding” was mainly of the first type, where
! T5 l% m2 {# ahomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
+ |- }$ M+ D6 lthe 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
; T, [& d) y4 N. J7 ^' G3 Z) c0 Wfrom the cyclical downturn, house price growth will
# x/ D6 `, Z: P  }$ M- W  @; P8 Vremain choppy and new residential construction will be
! N" |; @$ E! ~' T* tdampened, owing to this structural weakness. Construction
, V6 o& `+ p* wis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
1 q( F9 Z4 M0 ~* Y; K+ H4 A" t: U; C$ Nresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
& k7 E9 D9 P' t) l( n' _6 ]& bin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
6 l+ {9 V) ]" k! K8 @fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
) H" c# Z" i3 }/ W9 |values since house prices should track incomes over the
% E- b8 P. n) `4 v7 plong-run. Since homebuilders build to meet demand, we
9 f3 _' o) P" b0 z5 v8 Mregard housing prices and household formation as the drivers
* ?! b/ A5 E1 a1 i1 K8 p1 Eof residential construction.
) P4 i, j- [' ?0 G( ]9 ?To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
! B2 p9 s% ]7 B# m; w  D. L8 xwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
( d" ?1 r, O4 C  c' K  a, g9 l7 `fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
2 m/ x, [2 |& C% ^! v  K# n, hmany houses at prices that exceeded fundamentals.
6 t- A$ {1 B0 J  {2 {2 J* hRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already 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.
( V9 y. O+ K! z% O5 J6 {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
5 \& O: K( f- W% \. ^+ zcyclical 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
* W* _, o: }) |# v+ mcyclical factors would indicate, condo inventories could
: k6 x. g4 Y! T" H% M% ^spike severely – particularly in Vancouver. However, while
, a1 d2 k7 _, |& Nresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
* y" n4 _* U6 `" Y6 ~inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
- l7 n' D- {' J7 Z" B3 ROVERPRICED AND OVERBUILT: CANADIAN HOUSING
! ~! \" n. m1 L0 }: A) d/ @MARKET RETURNS TO FUNDAMENTALS
5 u1 g7 J& E) o; W6 aGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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