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
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
2 S! u3 E; |- afundamentals 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
three years.
' C9 V. x- d1 |- b: lBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
2 y: u) `1 n- c6 ^  ~4 z! f, F2 Vboth 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”
where builders accumulate excessive inventories. Although
) I5 D- x6 K; H2 _4 Mthere is evidence of both types, we contend that Canada’s
. {. L  g: g! b5 T9 P“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
1 K/ `+ ^$ T& RWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
* _, Y# k* {$ _means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
/ o2 U$ @' d& Y6 |from the cyclical downturn, house price growth will
* y3 f; n3 R" |( X: f- e8 ~+ premain choppy and new residential construction will be
  S4 C! C$ D/ p. V8 Adampened, owing to this structural weakness. Construction
  m1 R3 O& u# U2 m. Wis now undershooting fundamentals and we expect this
. E# O9 K. k; \. W0 y9 F2 E0 p. A7 Oto persist over 2009 to 2011. We anticipate that nationwide
2 U/ P& u  l6 M  y, N+ B* [residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
* k/ k. y4 ?* \5 c7 z: hin the fourth quarter.
% |, `  p8 |9 b- a* HTo quantify the degree of overpricing and overbuilding,
" O4 D5 u! [' K. V: U" vwe first develop an empirical model, based on long-run
3 c9 a# F( R0 V& |* D9 Kfundamentals of house prices and housing starts in each
8 e7 q+ u/ I' w" r5 i5 ^- R* D) fprovince. 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
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
) e" ~5 K1 `$ w5 e. L“counter-factual,” asking what level of residential construction
would 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
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
/ n% g! z7 y6 k- ualready witnessing surges in their unsold new homes at the
' @% N# t# p& d8 Y- m  Svery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
1 w7 Q- c4 n( H6 t5 H/ l# hhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
1 D3 _5 P; G9 K, s( k& xQuébec shows signs of strain – especially given the
+ `+ R* s- y, M8 x1 \" S5 nstrange 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
8 {7 E7 u: h) Crates. While Ontario homebuilding will reel from a
0 \7 \, I, N' ]  ncyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
  ?6 d) ^! m* ~( i7 j! O! a! K; zcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
- B) ]- T$ `4 p9 }: E% P4 w& N+ Sconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
0 a" g  g! x4 Y- uspike severely – particularly in Vancouver. However, while
& M0 [6 H" A% S) u7 dresidential 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
/ l. S% _2 e: W6 N2 o3 Pyears, which, along with improvements in affordability,
$ X# p0 b# H5 }1 Iwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
5 S' E. @( p9 v$ ]+ x/ MMARKET RETURNS TO FUNDAMENTALS
: a4 X6 V( v7 B0 EGrant Bishop, Economist
4 H  l, F% D0 W; g# L: l/ {) {416-982-8063
% v$ y6 P* B+ c2 bPascal Gauthier, Economist
  z6 i) M! X$ R1 }2 `- z* N416-944-5730

$ }3 [% m' S0 o( c. z1 U0 U5 s3 Z  bhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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