TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
6 o9 @7 {7 k4 _. Q: ofrom 2002 to 2008, unsustainable price increases drove
; q* X0 f' x/ y- f+ @unsustainable levels of building. Our view is that house
1 B& t1 s* L) ]) Jprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
! R# G8 O  |/ d5 H2 I: Boverpricing 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.
- Y1 r" w. D9 J+ V2 ZBy “overpricing” we mean that prices detached from
9 X3 y+ f: _6 |, F9 ]9 y" Ytheir 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
to fundamentally justified levels.
" y3 B( [8 Z% a! tWe consider “overbuilding” of two forms: “demanddriven”
1 c( c% O1 _4 S  _! Ewhere 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
“overbuilding” was mainly of the first type, where
' P$ x' Z; c7 Q1 M/ b' hhomebuyers pushed homebuilding to an unsustainable pitch
: A, d! b+ o: G4 bthat is now being rapidly reined in.
# ]4 X1 M9 M( i: `While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
5 U* u* O" G0 W" M; {, Vmeans a deepened slump. This overbuilding will likely weigh
. Q1 @5 N$ k: N/ F" Ron markets over the next few years. Even as Canada recovers
. L4 d( ~# o- X% l' x& Cfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, 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
) Q5 J1 m, e. K125,000 starts over 2009 with a trough around 115,000 units
& L6 R3 ?( q/ D0 Z- Cin the fourth quarter.
To 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
! m5 W) C9 N! yvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
2 K" ^" K* ~, [( Fregard housing prices and household formation as the drivers
/ G4 m) `; {$ y6 ~3 Dof residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
' x; z2 A7 m8 a5 @# nwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
" o. I: @- _! h$ ~/ z: [0 afundamental-justified level by about 12%. Although new
3 Z7 y. Y0 d% [units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
2 I) h% P4 m; G, P+ n7 yRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
. N: B& Z, D4 P' m! J( falready witnessing surges in their unsold new homes at the
% ^0 R$ j- b( z! g, X0 j* T7 i. bvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
. m2 ?; a4 y8 a. F3 ?has been relatively balanced but, while not plagued by structural
! G: C1 l5 h% E9 l+ G, n) hweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
  p  t+ Z* F3 d$ K/ G* ?) C, Dgiven the province’s history of under-building and low ownership
( j+ y: ?, a) V, {1 }' a  {rates. While Ontario homebuilding will reel from a
% `. q' y3 f, j: Q' @- W. kcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
( G* ]! M% `- q2 |6 a7 n# Ehigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
# t6 D9 Y7 w+ [5 N9 ^- a% Ycyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
4 j1 p1 X/ t# \' b4 _" M( s: k/ |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
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
# _9 h! A- [6 ?( r5 e. P1 lOVERPRICED AND OVERBUILT: CANADIAN HOUSING
4 O+ Y9 k$ |' p- o! t" t3 LMARKET RETURNS TO FUNDAMENTALS
  s+ O7 ]0 o7 f- g; \5 I# BGrant Bishop, Economist
416-982-8063
: K( j" P( ]4 S! V5 x) g/ R. aPascal Gauthier, Economist
416-944-5730
0 m3 V! ~* Y6 f( e
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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