TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
% O+ A8 C% n3 G, C( a! H' Ifrom 2002 to 2008, unsustainable price increases drove
* `& f! d) ?$ a! c$ @unsustainable levels of building. Our view is that house
# ?; r! r8 _0 Jprices exceeded the value of housing that was justified by
; K, ^& a, `8 k$ t& w  F4 x  Bfundamentals by approximately 9% nationwide. This
  K/ I1 l; L8 [, Koverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
4 H9 F+ r2 P' m; p- t0 `12%, an excess that was exaggerated in the past
( X( s* I: X% p% [+ xthree years.
By “overpricing” we mean that prices detached from
their 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.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
; ]% D; r) s# owhere 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
0 q* B7 ?! y( {6 o) C3 n0 \that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
7 G0 v0 {; V& ^8 gthe construction of too many new homes over the boom
# c" n1 b8 U/ e3 @" s- N( x3 vmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
) ~" {& Z( G3 qfrom the cyclical downturn, house price growth will
' j+ B* s6 X6 S) B% \remain choppy and new residential construction will be
+ t! P" v0 k  w8 J. ~7 h# }) {dampened, owing to this structural weakness. Construction
. C2 L) |2 n  l2 Z* P. cis now undershooting fundamentals and we expect this
3 I: U! s! C1 Jto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
5 \2 C% F4 f( |125,000 starts over 2009 with a trough around 115,000 units
# Y1 t- p* |+ \: v' ]in the fourth quarter.
" Y$ X$ [  Y/ q5 A' J4 ^: yTo quantify the degree of overpricing and overbuilding,
( j5 {( K" Y2 b" hwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
3 X8 I$ v/ @. E- C0 q0 Mprovince. 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
8 }# }5 Q7 x# z! A" p! K2 X. vregard housing prices and household formation as the drivers
6 C- ~" o9 K8 @- R1 y+ qof residential construction.
7 @+ M* O0 Z# pTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
/ ]" X6 u7 u+ _& X" Q9 }7 C5 wwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
7 G/ F/ R9 ]0 v7 f, k6 O# `many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
& D: x9 K' l$ F6 Cwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
$ N" M; r3 G0 `4 h/ h3 s) p( V0 [very time that the resale market has swung into strong
: C7 O9 N% T4 }3 T1 g* _; \# Mbuyers’ territory. Homebuilding in the Atlantic provinces
3 e- y9 C& W8 a2 shas been relatively balanced but, while not plagued by structural
  j; R8 A: ]. M* e' P5 C5 r8 bweakness, will be singed by the downturn nonetheless.
4 F+ Z4 N$ g5 y; `: f/ K% aQuébec shows signs of strain – especially given the
( _  h0 Z- R: ystrange accumulation of unabsorbed multiples on l’Île de
9 A4 I# W2 c/ d! C5 tMontréal – but recent building has been relatively balanced,
% K$ S# O! f4 r( F( u* e( Q, n8 _5 lgiven the province’s history of under-building and low ownership
9 h5 J; O0 l& D+ Y( H& Z) Srates. While Ontario homebuilding will reel from a
1 Y7 |+ J/ U7 q: T& Gcyclical downturn, the degree of structural weakness appears
9 b7 j2 q, |0 wlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
* @; Y! b8 S' d" ?5 a) Xhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
4 z; B. y5 E+ D6 Y4 u9 U6 {6 ospike severely – particularly in Vancouver. However, while
7 D. r1 ?, M8 g4 u$ |% p' W/ M, c, M( dresidential construction in B.C. will definitely droop, we
- w9 v5 h. Z2 X& yanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
8 P5 Y9 b3 m# a; `! d' F& hyears, which, along with improvements in affordability,
" {+ V& T/ i# ]* e1 c+ Uwill alleviate some of the pressure from overbuilding.
. t4 C0 @% n) sOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
* `1 E# L: z3 s+ a2 E8 E* iGrant Bishop, Economist
3 f+ Z5 R& |  {3 X; o416-982-8063
. S7 i9 c* _1 _& m9 rPascal Gauthier, Economist
  a; K& B# J( f( j3 `5 c416-944-5730
# Y, u* Z$ p$ |. t7 j+ c
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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