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
6 r& M( l6 p; T  Qunsustainable levels of building. Our view is that house
+ q+ ], j- I& z% _1 I. ?prices exceeded the value of housing that was justified by
7 s3 M6 D+ }2 c# hfundamentals by approximately 9% nationwide. This
- P, _1 }5 @( ~( N+ G. Voverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
6 ?2 B4 _/ J0 Y12%, an excess that was exaggerated in the past
three years.
8 y/ L8 c& t) z5 L3 E5 FBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
, L* d9 x' Z8 J8 U5 m. J4 r: fboth a cyclical downturn and a return of house prices
2 U2 w: B  R; i1 t1 L9 ?+ u; \to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
- T- P8 E8 l( s$ F% f  ]% U4 Gwhere homebuyers buy up too many houses and
  S4 U9 {' y: \+ K! ~8 S, ^' bthat this demand cannot be sustained; and “supply-driven”
/ E. n0 q# a4 n: j3 Gwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
# f  M5 a1 T$ _+ Bthat is now being rapidly reined in.
: l5 Z$ ^9 S/ k: |5 @1 `. k# bWhile 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
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
* \8 F9 w# D  f& ~+ c. l  R  sremain choppy and new residential construction will be
! W3 m& X) y9 q' Y) n. odampened, owing to this structural weakness. Construction
5 L9 Q3 |: }9 T+ j; z3 jis now undershooting fundamentals and we expect this
1 k1 K) M; L7 fto 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
in the fourth quarter.
0 E$ L3 l* b% e4 KTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
  D; w& c! B0 t) r# yfundamentals of house prices and housing starts in each
7 [! C0 E7 Z, }/ B! [5 Yprovince. Affordability is the key concept behind home
; `% S  F% l: R' M2 |& |values since house prices should track incomes over the
* K0 s3 s6 E9 G/ j" z7 ?: F0 Dlong-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
! i; \  s$ K& v" Q  ^- u5 Z4 M" N“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
6 c9 W+ ?3 }& @$ f4 M: poptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
4 M; s8 h* N$ x7 F* I5 C7 |: smany houses at prices that exceeded fundamentals.
% y1 {9 J  X( nRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
/ b6 X4 v) T. v2 Palready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
1 P* H/ e3 g5 r$ c; n2 pbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
8 a  b* f: Z2 zweakness, 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
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
! Q5 n8 m# ]! Y  }6 r+ e3 Nconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
  N7 R( c. x  t. k1 F2 ^cyclical factors would indicate, condo inventories could
spike 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
inter-provincial and international migration over the coming
) p3 |! g: ^! J) [5 o5 y9 i, ~( _years, which, along with improvements in affordability,
& J# K7 U' `( a# d, |% U! i+ pwill alleviate some of the pressure from overbuilding.
1 b- s9 }" v6 o1 x4 q! sOVERPRICED AND OVERBUILT: CANADIAN HOUSING
. Y& a5 e0 U# k/ MMARKET RETURNS TO FUNDAMENTALS
% t" b. u' j) ?5 ]8 Q1 GGrant Bishop, Economist
4 c4 S% Z7 `& B, b1 I1 z416-982-8063
Pascal Gauthier, Economist
0 d, s7 c0 B9 v+ H416-944-5730
( V8 D; W8 }3 U
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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