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
/ N- O& b2 L. `/ e% Iprices exceeded the value of housing that was justified by
; w% x6 c4 _& Kfundamentals by approximately 9% nationwide. This
9 P7 Q1 \0 t2 zoverpricing compelled a level of residential construction
3 @. z# |/ M* vthat exceeded its fundamental-justified level by approximately
. o% V' x6 j# X# X* e2 q1 z12%, 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
" P3 p5 F8 i5 N' {& jto fundamentally justified levels.
# Q& e6 |7 V. X9 H/ o( mWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
% d- _6 I0 s. b& x! gthat this demand cannot be sustained; and “supply-driven”
& U( g& i5 B. \8 Swhere builders accumulate excessive inventories. Although
+ v, W) l- W0 D% a" u$ Vthere is evidence of both types, we contend that Canada’s
* A# Q  v# \! l* Q) o! Q2 @“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
# g$ u% i5 c+ ~' S, s1 G9 ]5 T/ O1 IWhile most markets won’t face U.S.-style overhangs,
# a# S- c/ Z6 ~, hthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
1 p9 _4 s0 p/ r$ o: Son markets over the next few years. Even as Canada recovers
, {: E! N6 V/ \+ C+ K+ Y# Ufrom the cyclical downturn, house price growth will
. ?! j, Y3 e- e5 Zremain choppy and new residential construction will be
5 t. E: j" _. v1 m9 A! a9 }dampened, owing to this structural weakness. Construction
* L! U; d3 o: W2 E2 dis now undershooting fundamentals and we expect this
# t& {+ I2 }8 z5 f5 Y) U9 Bto persist over 2009 to 2011. We anticipate that nationwide
5 ^. H1 j* D  I2 R1 r# a7 nresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
7 M4 v2 {# o3 }in the fourth quarter.
9 s; V% |" i! n) W/ m) PTo quantify the degree of overpricing and overbuilding,
# V" e, [, x: r' ^3 I$ iwe first develop an empirical model, based on long-run
- k3 b) z) g2 f6 E  ffundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
: u7 w4 |& m4 ~- ~long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
$ Z; [8 l2 W7 }& {6 }To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
( |  G. u" X5 r9 b2 a7 fwould have occurred if housing had been priced
3 i1 n- v  z3 J8 @# _+ ^+ |optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
6 G1 Q+ W" b2 x. K1 L& X; cunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
' U$ r& @" h. h' o6 lwhere housing demand will further contract under waning
; n0 S- o3 w) N" H" tpopulation inflows. Saskatoon, Calgary and Edmonton are
, I+ I+ Y1 |1 j3 d5 }already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
1 [4 r  a& \4 e5 Abuyers’ territory. Homebuilding in the Atlantic provinces
# u. W3 {+ s8 v# ohas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
  t/ s' \# A% g! bQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
$ y, Y. ~$ t' ^$ Ugiven the province’s history of under-building and low ownership
% X' S  Y  Z( l4 E* v6 K' \2 p* {rates. While Ontario homebuilding will reel from a
  b3 G8 w; B, u, X& w( ncyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
$ o& G2 S2 c  G! whigh levels of apartment-style units presently under
1 \" ~! L% B. P2 a. |3 i6 G1 Kconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
7 q0 Y' j7 H" N0 Gcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
: w6 s- D& A! H6 Tresidential construction in B.C. will definitely droop, we
' y" X4 f8 Q+ S# {7 x; h' \anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
( H+ x) ~. Y4 s! t" _years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
6 G1 i+ [4 M! j6 E. f( A% WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
6 f2 Q" w- d% C1 Y8 dMARKET RETURNS TO FUNDAMENTALS
% N+ [; {& e( O8 u. fGrant Bishop, Economist
) y/ \! T) m4 \  @416-982-8063
) H8 _# i6 L% U- `Pascal Gauthier, Economist
! V4 i5 e! R6 r& U+ ^' H1 h416-944-5730

7 R3 T+ d& Q0 @) ?0 Whttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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