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
$ a) [8 o" Q: F. hunsustainable 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
2 A! N; f  Y+ R4 J; p1 ]5 L+ c12%, an excess that was exaggerated in the past
/ _# B% b  a9 Vthree years.
6 J2 g+ M& [7 D( D' z4 ]/ w9 ZBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
' j8 d. f/ `- r" h% ]affordability. The current unwinding of house prices reflects
0 j- T1 M/ |2 S, ^0 M: Tboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
! d# h% D' ]- L5 n5 Swhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
3 g/ Y. N$ \+ @( Fwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
4 {0 b8 c8 u% _& s, ]homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
# X0 E0 q2 ~, W2 s7 hthe construction of too many new homes over the boom
; [  w' M" H3 P! bmeans a deepened slump. This overbuilding will likely weigh
2 q9 A8 n) W! f- G5 k1 von markets over the next few years. Even as Canada recovers
% M, h' S! p: n7 a3 _from the cyclical downturn, house price growth will
" b) l+ w$ O- X3 qremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
/ z% }5 F- Z% f# Kresidential construction will fall further to around
" o' K" a% v4 K7 `! ^& V! J125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
# e% i: u  f5 ?8 ~To quantify the degree of overpricing and overbuilding,
- m. K9 O% z( I! T* Mwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
/ g: p: T7 m- jprovince. Affordability is the key concept behind home
5 E. G; W6 w2 l' k, {% h+ T+ _' d& C* Qvalues since house prices should track incomes over the
5 r% E4 Z6 Y7 i% f& _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
9 E! p8 }8 k$ U, @( q$ _“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
; F2 M* q3 ~) T9 ]5 jfundamental-justified level by about 12%. Although new
0 ~0 r- F3 {5 J3 e& kunits were being absorbed, homebuyers simply bought too
" x; x# k  M& Y7 Q% {- g% Mmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
' D9 b2 e, u. S" \% Uwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
; U1 N  ?7 l2 x3 x' F( G1 K3 ^6 {% aalready 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
$ a  X" h0 @0 ^9 u" }. S( J# Xweakness, will be singed by the downturn nonetheless.
/ q/ p3 H+ q; u* XQuébec 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
, H: F1 z9 V) o2 i" a* lcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
3 |0 S5 h/ l( s  e, zcondo market. Both in Toronto and Vancouver, historically
' v+ y8 ]& b- I; x' [1 H, U4 Thigh levels of apartment-style units presently under
1 e' D4 {4 Y5 X! I2 r  A: hconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
4 G  s4 b: G: K* v/ W2 z. gcyclical 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
: N* I" D* }9 H/ k! ninter-provincial and international migration over the coming
, Z. U0 J+ Q+ h3 N2 O) W6 [years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
# a- b1 V4 K0 c" vMARKET RETURNS TO FUNDAMENTALS
. P' e, H; [9 T& M8 N$ {Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
5 B0 c% c; X7 U; s9 k2 C+ X+ d
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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