TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  o- W9 D# }$ z8 n0 F8 s: S9 Mfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
0 H9 I7 ^7 |" Jfundamentals by approximately 9% nationwide. This
3 k7 `8 B- D$ woverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
$ c% h. _' v% M+ p; ^three years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
, T1 |  s/ h. |: g" Eaffordability. The current unwinding of house prices reflects
7 s5 i8 p) X: T3 ]6 T, n& aboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
! V; X* [- s8 ~2 u3 `We consider “overbuilding” of two forms: “demanddriven”
* H$ O3 [9 T  Z9 |where homebuyers buy up too many houses and
$ \0 ?9 ^" R6 j  Xthat 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
“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,
: T6 i# ?' K8 @4 F' K: X# Q& l% |2 Bthe construction of too many new homes over the boom
# ?* a7 F3 h# S" }! X1 n" bmeans a deepened slump. This overbuilding will likely weigh
# P- B5 K+ q% k+ @$ {5 |on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
0 o* A0 d  n2 @0 o$ R9 g5 E9 Udampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
$ Y% c. \, k9 }; J, sin the fourth quarter.
+ O5 x; [) G- k3 {  l4 yTo quantify the degree of overpricing and overbuilding,
) J8 x' f0 D# Nwe first develop an empirical model, based on long-run
! f9 {; A! h' yfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
: e2 I, Q8 v  w% Z8 R# d9 H% ?values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
! ?$ l3 d6 Q: R  Uregard housing prices and household formation as the drivers
+ d4 f7 r( {% |0 N# E& e8 y" Uof residential construction.
To examine the degree of overbuilding, we employ a
& o! Z, h7 @5 _) W' a“counter-factual,” asking what level of residential construction
$ Q9 Z0 p- a1 Rwould have occurred if housing had been priced
& @, q2 @  A$ y! B+ R6 y& {optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
( Q" @( s) [5 iunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
9 R$ J/ ~3 M6 G0 q# h2 Fwhere housing demand will further contract under waning
4 Y- U& w) X) |! Z" Opopulation inflows. Saskatoon, Calgary and Edmonton are
1 J/ S4 j) K! \0 P+ zalready witnessing surges in their unsold new homes at the
; n0 K+ Y- |$ Hvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
' Q3 M1 m( d! K6 b4 U6 zhas been relatively balanced but, while not plagued by structural
& V  y' a+ l( C0 X( ]; Kweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
4 ^" t0 B5 ^! t: X/ Fstrange accumulation of unabsorbed multiples on l’Île de
# ~# y  r' C( h% m2 ?; C/ m; jMontréal – but recent building has been relatively balanced,
: a. d, G+ @/ W" K$ b, e7 q1 Igiven 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
+ q% O4 h: C- h9 rlimited – with the important exception of the Toronto
+ i( `% N# F: Y% u! Bcondo market. Both in Toronto and Vancouver, historically
* _6 U1 p/ V- ^$ p% Fhigh levels of apartment-style units presently under
+ _0 ^4 n5 ]5 i; P( S+ E' b7 vconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
+ J$ z0 j" x0 \* K0 w" [cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
7 L+ G( E( `8 A5 P# E8 ]residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
% U) d4 U( }: `1 @$ \years, which, along with improvements in affordability,
! S: V, s0 W; E3 |5 P7 rwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
$ m$ N7 V; C% I$ pMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
% ^7 ^" d) w7 V" X6 ^! Z8 e$ Q416-944-5730

7 C0 a9 A* V& U) dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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