TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- z' |' E/ h( Y0 K3 `from 2002 to 2008, unsustainable price increases drove
% I8 H( ?" v* r4 X4 J. e& Lunsustainable levels of building. Our view is that house
  m$ |+ h/ L" R' z. J, T& ?prices exceeded the value of housing that was justified by
( o+ }6 q, O* ~5 rfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
& x6 k) |- M4 ~4 B8 ]6 b12%, 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
9 b# e. E7 ]9 I2 L# S' Caffordability. The current unwinding of house prices reflects
- |6 p* X" C+ Q6 S7 D* kboth a cyclical downturn and a return of house prices
7 Z- A' t/ @2 [  a0 ]1 P1 P. Gto fundamentally justified levels.
* a: @5 ~7 U" S! o% ]6 uWe consider “overbuilding” of two forms: “demanddriven”
' X# o( K( G0 c  iwhere homebuyers buy up too many houses and
4 _: V; p- {7 `that this demand cannot be sustained; and “supply-driven”
* @; |" \0 ?+ M7 L: W9 dwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
8 ^0 ^2 f8 H6 m“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
9 p& b! L8 W* d; a) i. GWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
7 I0 e! }+ g, n: Dmeans a deepened slump. This overbuilding will likely weigh
( C6 c5 Z+ O0 i2 m1 jon markets over the next few years. Even as Canada recovers
0 w2 M+ n9 o( h7 X" y' A" _" zfrom the cyclical downturn, house price growth will
, y" |  _0 E" aremain choppy and new residential construction will be
- B! U$ h( @& Y/ m+ ydampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
, s6 G' M0 E7 r5 ]3 Jto persist over 2009 to 2011. We anticipate that nationwide
$ L% V7 X1 U" D3 _) I# S/ Q( @; Rresidential construction will fall further to around
6 G8 O, X+ \& G; Y( I4 S" _2 Y- j125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
8 A) p# B: _% e" u$ ~* ^+ LTo quantify the degree of overpricing and overbuilding,
3 Y+ F0 p# l. d" qwe first develop an empirical model, based on long-run
0 _, E) ^$ M. V4 ?  K* b! {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
long-run. Since homebuilders build to meet demand, we
# u: y9 @  L  Bregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
/ A* Q1 h& f! B* Y0 Z( p' [% Nwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
4 t4 K- R  v, o+ h2 _6 L) j  [- |9 F. gfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
( s* I3 q- t+ l1 [6 ^many houses at prices that exceeded fundamentals.
/ J* K+ r  b4 q! O$ T1 bRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
' T+ {6 p1 v' G% O7 qpopulation inflows. Saskatoon, Calgary and Edmonton are
; d! _2 S; J* galready witnessing surges in their unsold new homes at the
. _/ c3 D8 I# every time that the resale market has swung into strong
0 K: {. T5 a. ^; v" P. Rbuyers’ territory. Homebuilding in the Atlantic provinces
1 y/ _& {1 s% yhas been relatively balanced but, while not plagued by structural
; w0 D1 I" s9 S% D! ^weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
; F  ?/ q' e& ?/ L6 g, Astrange accumulation of unabsorbed multiples on l’Île de
6 x0 I) ]6 V! Z- d9 {" O- Y1 nMontréal – but recent building has been relatively balanced,
2 v2 S) j; `2 E, V$ f8 m, E7 Ngiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
% e6 b6 y2 [0 Y: `: Ucyclical downturn, the degree of structural weakness appears
' C2 i& ^0 L( U: \* ]8 p" Olimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
5 r* V: N$ H1 l  _high levels of apartment-style units presently under
construction mean that record numbers of condos will
- u; I( c2 F* Z  M; xreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
, n: ~0 G) e+ l2 }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
; N% h9 h$ o; M# a/ m% ~: Pyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
- [3 D! e! A( E$ FMARKET RETURNS TO FUNDAMENTALS
, q3 b" K2 i, ]6 tGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
5 Z/ |- H% ^' v' Y! B- V; d7 K
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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