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
" E7 I- y3 v6 R$ Y! h1 Iunsustainable 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
12%, an excess that was exaggerated in the past
9 o7 R+ }0 k0 b! w1 L5 ^4 F' hthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
$ E5 f; q# j+ ?% |3 a; Eaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
* O0 C: K1 K0 x% r4 a; rto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where 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
# T1 c8 \( w3 N* `. ~+ Y“overbuilding” was mainly of the first type, where
# k3 Q3 l/ ^! ^! Dhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
7 t% M  e, N' v9 k9 e- Pthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
! b5 A. \& L, g' O# }6 ~2 ]( X# hon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
" [6 [* e- h% p5 o* n. J3 G8 Qremain choppy and new residential construction will be
/ g9 w2 [2 F# [( jdampened, owing to this structural weakness. Construction
1 m8 S% s% f! Mis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
2 z2 _' C" _  Q1 m8 a125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
  [9 B* k* L5 m+ kwe first develop an empirical model, based on long-run
, }5 E0 C1 l' {% s  w( |- J7 ufundamentals 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
long-run. Since homebuilders build to meet demand, we
- O8 a4 }3 G: C( R! Y, H  }regard housing prices and household formation as the drivers
* o5 P- i! D/ \( J8 e. Pof residential construction.
, l/ i8 d: k2 C8 C$ YTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
  [3 s4 A+ H. d  P% T  K/ w$ J' s2 [would have occurred if housing had been priced
# \5 \) K8 E4 F* e- foptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
" m0 E0 T3 A# l  z  t7 @/ funits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
) s7 w# e& m5 J4 ]. K6 k& ]where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
: [) f/ p- _; t4 S2 c4 B* s# balready witnessing surges in their unsold new homes at the
, V9 h+ K+ k0 k3 e. _very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
% b+ n, q9 ?' F5 ~has been relatively balanced but, while not plagued by structural
4 q- m0 ?4 Z+ Y3 E& j% k  pweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
; w: t8 N/ O5 w9 Dstrange 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
& e" i& y" @- |rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
# d3 B* B+ F" H5 n: @$ Q$ x9 olimited – with the important exception of the Toronto
$ _) H! _" ~7 S  M, }condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
- O. |* V: e; ?1 Dreach completion during 2009. If absorption rates fall, as
9 u+ w2 K' d4 I. K  dcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
% P( ]$ u; _# `' |0 n; [3 Tresidential construction in B.C. will definitely droop, we
& p* `' ]' h" F3 K& X) ~* @anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
/ }! j2 d# ]4 w5 o& Q! Ayears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
$ z; Y  E& W# k9 k, R/ G1 VMARKET RETURNS TO FUNDAMENTALS
# j7 c  W5 z1 ^, s  _Grant Bishop, Economist
/ Z! Q' F' c, g( i" ~416-982-8063
4 ?0 s# d1 b0 _' O' W! n: XPascal Gauthier, Economist
416-944-5730
; l% @7 G. T9 }; L4 Y
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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