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
0 S- T; c! C3 g; yunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
# c! ~0 Z0 h8 Xoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
* N( z9 F3 i1 i2 ~4 X% r: B% H- htheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
5 J+ ~8 T* d1 aboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
. {( w- i: R! g) S! twhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
) Q6 H4 Q  R/ fthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
/ e# E* S; m  j* jhomebuyers pushed homebuilding to an unsustainable pitch
: S: Z4 l7 ^( pthat is now being rapidly reined in.
/ }2 F" j# R8 x/ ^  m# \# sWhile most markets won’t face U.S.-style overhangs,
" i6 z2 T7 R# W: s4 jthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
; I- v3 `# |3 a* K" k$ ron markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
  [$ `  n0 ~- \5 H0 J9 Oremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
' ]* ^5 K+ Z5 @# Bis now undershooting fundamentals and we expect this
5 J8 k' ]9 a% C/ q( G$ a( ]to persist over 2009 to 2011. We anticipate that nationwide
. v- v; _( Q: ^  G! V/ Rresidential construction will fall further to around
% S$ T* |& H' _125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
: \! S, u4 Q* l! STo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals 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
' R9 h/ q4 D. `4 A* u9 D* ]long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
8 _5 R1 w4 h% ?0 F1 L* V& M2 N6 cof residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
& l$ v; c. I# |# u6 F2 nwould have occurred if housing had been priced
( W3 M* U0 G4 i4 {5 c' }optimally. We find that actual homebuilding exceeded this
: k1 h, b2 @6 tfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
5 ~& q  ?1 O/ A1 R" o' zmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
( f6 k* ~3 {& mwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
" O: v" a6 T3 x: I. palready witnessing surges in their unsold new homes at the
, x( h0 ]: \3 kvery time that the resale market has swung into strong
% `) M* P& s5 h7 jbuyers’ 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
; P2 X0 R; V7 C9 k9 ]strange accumulation of unabsorbed multiples on l’Île de
, [0 P& M; g$ H0 l" gMontréal – 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
/ Z2 `& ?6 M+ `/ wlimited – with the important exception of the Toronto
% e4 Y& W9 `" R" d# _condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
7 o& V4 i8 _+ O7 i2 R7 ^construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
1 f; \& e' q& |& E5 C: r" \residential construction in B.C. will definitely droop, we
5 N- \' n( t! ~6 p# aanticipate that the West Coast will continue to benefit from
" N0 X4 q& Q) l  ainter-provincial and international migration over the coming
. M  g9 u% y5 a( b; Jyears, which, along with improvements in affordability,
9 T4 j' H/ U$ Y$ s1 Ewill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
4 y3 H: z! f$ _1 f6 ?Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
% w8 ?4 B# J+ U, E7 x416-944-5730
1 g4 |8 ^+ I& N% K; `1 F' z/ y
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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