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
1 s( F0 l: O. w* A2 [( Wunsustainable levels of building. Our view is that house
  q: y% R# O$ n) Y, P4 B$ hprices 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
12%, an excess that was exaggerated in the past
7 p  z/ e8 }* c$ @three years.
4 W5 h) E+ m) H6 C+ R! SBy “overpricing” we mean that prices detached from
# i2 N" d8 b6 a. Qtheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
6 _  i% Z+ z& N8 Yboth a cyclical downturn and a return of house prices
! F2 [) p; N0 K. r) ~3 z1 \& Jto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
: R) i0 D" l3 T3 y/ N( @/ Z; E( z/ pthat this demand cannot be sustained; and “supply-driven”
7 U- ^9 i$ W4 x) e3 t# a( xwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
% x# X6 T( b; r9 Lhomebuyers pushed homebuilding to an unsustainable pitch
  t/ w1 l- n/ @" F8 Z/ c/ d- ?that is now being rapidly reined in.
While 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
6 A8 _% J9 n) g: z: _on markets over the next few years. Even as Canada recovers
/ o9 {) R. @5 x/ K, K; d( mfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
8 w  c  p- ?3 N" @is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
" m* z0 ?' `# O0 Hresidential construction will fall further to around
% g) x/ u6 }; @* ^' ?2 j. m0 V125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
! p7 `- r9 H1 Iwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
  i* x# K- @' P. F/ jprovince. Affordability is the key concept behind home
8 ]- d$ s! C4 J, E2 d" Nvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
( N. F. P; e, \/ O. Sregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
- r. J  ?6 u0 L9 F“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
0 H2 v. D9 s/ Sfundamental-justified level by about 12%. Although new
% A8 s7 @% T' ~' `7 ounits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
2 {2 m9 i5 c+ |already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
: p, z) G' n8 C/ ^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.
Québec shows signs of strain – especially given the
. B6 _2 v' m9 @& z" K$ T% B5 ostrange 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
" A- a' c6 \0 r2 {# m+ qhigh levels of apartment-style units presently under
$ l; [( J+ W" g% |. Dconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
( @# y) Y4 m; T# Y% ^cyclical factors would indicate, condo inventories could
: K' [2 P/ R' `. Tspike severely – particularly in Vancouver. However, while
) U* I- M! h' `5 R/ _2 Tresidential construction in B.C. will definitely droop, we
9 X2 W5 Z4 M) C; t" Qanticipate that the West Coast will continue to benefit from
2 W( D! M/ t, V7 [/ E; Rinter-provincial and international migration over the coming
$ E$ |3 c+ v/ vyears, which, along with improvements in affordability,
1 [3 V3 C) X- h* ?will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
3 x& @% y2 a) h- Y) P; c; M* C416-982-8063
# Y. D8 `+ ^, qPascal Gauthier, Economist
1 N0 n3 m8 o* ]: U416-944-5730
5 ?& k2 M$ }$ C; o+ C: d
1 v: l$ N8 u, Whttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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