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
* e" Y7 t: j3 [/ v% @8 zprices exceeded the value of housing that was justified by
  S' y' m/ O! q: ]/ h  Q0 ^) Bfundamentals by approximately 9% nationwide. This
* G/ N: Q( Z  Y3 R6 ^4 L* Moverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
/ s" o9 o: B& z, @" |12%, an excess that was exaggerated in the past
3 E5 G9 K6 p, G: \6 P9 o8 \three years.
. [/ B  L" N6 }' uBy “overpricing” we mean that prices detached from
0 L' U; G' K# B/ u/ ]3 ctheir fundamentals, as witnessed by a steep erosion of
4 v' N3 M7 j# N& O6 V! O6 Iaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
) l+ ?' f% l) H& EWe consider “overbuilding” of two forms: “demanddriven”
. Q7 Z! ?  o" i' N4 |: o4 h6 Nwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
8 h: O9 _* `  e5 g( O4 z“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
& a. ], L( P/ Y5 y& `) u2 xthe construction of too many new homes over the boom
) h2 `& a- m/ n+ omeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
1 l! q! U4 c7 c1 g0 dfrom the cyclical downturn, house price growth will
& f6 n/ R8 W8 l' n- \# H& M/ {remain choppy and new residential construction will be
; _5 k2 N4 a6 L% Zdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
' {" ^3 R* b* z8 Y- tto persist over 2009 to 2011. We anticipate that nationwide
" c' Y7 I5 y5 v5 n  Q2 cresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
/ O1 v9 U' _1 {in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
2 n: w% x# k6 _we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
: V( s& u8 C3 A/ d- w/ b/ Nprovince. Affordability is the key concept behind home
1 t" J% s* s) `values since house prices should track incomes over the
. `' y* F/ }6 r5 [. H% dlong-run. Since homebuilders build to meet demand, we
: y, g3 t! o7 k% m% K+ @/ Qregard housing prices and household formation as the drivers
of residential construction.
, z( t. M5 @4 w8 F/ b0 @To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
. v, X8 ~4 g# T8 q, x  f, M6 ]# Iwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
, v: l8 _5 C9 s$ A  B- O9 W* Uunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
6 \4 Y1 j; t4 {, v6 R- F, URegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
* ]8 W* e6 m8 m" ~already witnessing surges in their unsold new homes at the
; Z- r  z& [; Svery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
/ K6 C; e) R8 E5 p9 k7 d: h8 {& Ohas 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
# W2 E+ A& \+ p9 m( G: x6 ?Montréal – but recent building has been relatively balanced,
. s; P: j9 p$ Z% L& ygiven the province’s history of under-building and low ownership
$ w4 C' a' I! V" r* nrates. While Ontario homebuilding will reel from a
$ ^# L! z& L9 m1 |1 ccyclical downturn, the degree of structural weakness appears
3 g4 N' g; p" ^1 w! H8 F  Ulimited – with the important exception of the Toronto
) s4 f0 n& P9 Y- d( P) gcondo market. Both in Toronto and Vancouver, historically
4 K) ]% a% D0 W2 V( \* ihigh levels of apartment-style units presently under
% k) J) r" A; w) B, Q3 i. Yconstruction mean that record numbers of condos will
: @  h% \7 Q, n! Yreach completion during 2009. If absorption rates fall, as
2 Q/ ~* @% P5 u1 D2 l5 A4 o* zcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
- S4 |5 J, I! Q( @1 Tanticipate that the West Coast will continue to benefit from
4 H  p+ h! }. Binter-provincial and international migration over the coming
+ A' F) c3 x$ `/ pyears, which, along with improvements in affordability,
5 S2 A+ y5 C1 T: z0 i0 A+ Xwill alleviate some of the pressure from overbuilding.
# M7 d* j  j8 u0 C' \2 YOVERPRICED AND OVERBUILT: CANADIAN HOUSING
0 a9 c( P; e5 d% |$ Q1 D7 rMARKET RETURNS TO FUNDAMENTALS
7 E3 _3 c: A1 d, y; i4 PGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
  i+ q) d( L1 f% F( F" d
6 J6 G0 y% q7 \7 j# \http://www.td.com/economics/special/gb0409_housing_exec.pdf

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