TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
( O* x8 ~4 r! D6 d+ Lfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
" M, e% d  P, ~# a, p: w% Hprices exceeded the value of housing that was justified by
. h9 `9 c0 }: s' u6 L( j2 `9 tfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
9 @" T4 `+ k% s, B) u+ N# zthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
5 X* ~7 Y& G- W1 J2 R) J" wthree years.
By “overpricing” we mean that prices detached from
# s$ W7 A4 K& W  Y$ wtheir 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
5 |8 Q5 x' j8 Eto fundamentally justified levels.
5 _4 ~" q; J! B3 M7 r& e6 |0 GWe consider “overbuilding” of two forms: “demanddriven”
8 N6 N" C( X5 Q6 r$ R; Vwhere 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
: |* ]) o) B  P9 j, i* G% zhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
' M7 [) w- M  B5 N5 r9 g& [7 [While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
9 D- }6 ?# C, O+ G; Oon markets over the next few years. Even as Canada recovers
3 b. b+ F" n. T. o# {$ q4 u1 kfrom the cyclical downturn, house price growth will
5 N4 N: S2 f& [; s* |6 X" mremain choppy and new residential construction will be
0 |8 o7 c/ A! s0 _8 Idampened, 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
/ D( q' M7 z; s/ r' d' Min the fourth quarter.
4 `1 w" b+ d0 wTo quantify the degree of overpricing and overbuilding,
9 d7 T/ K/ f9 j7 g5 N3 S3 w% p2 ?we first develop an empirical model, based on long-run
& P, Q) Y. a& z* w0 y7 W2 c0 Bfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
' s! V7 v) K0 Q9 i5 cvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
, }- n6 [& ?* T, P: W4 [  qregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
  W+ w6 e9 {! z! [“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
( r9 B, c; W8 `' |optimally. We find that actual homebuilding exceeded this
- V. [$ p6 u) S4 tfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
) D, c. i5 c4 ]3 Y1 q: ]4 V8 XRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
, \& _+ j/ P' B8 }very time that the resale market has swung into strong
; e. O& a3 g4 m0 N0 i  xbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
# q# U% J9 b; E1 T3 Z) kstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
2 a3 i: h6 @2 b% J& Zgiven the province’s history of under-building and low ownership
& x- |* u) m' c5 z7 o3 r7 t9 o7 mrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
% S0 ^6 ^! k8 \4 C: j5 [high levels of apartment-style units presently under
construction mean that record numbers of condos will
8 [. ?0 a; ~) U4 A! u4 `( K- ^reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
2 S1 K  {9 A% sspike severely – particularly in Vancouver. However, while
8 T9 H/ q4 j7 H& }" eresidential construction in B.C. will definitely droop, we
3 H; `/ }4 p) m( Y; {anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
* e$ M9 ^/ x9 A! n7 Iyears, which, along with improvements in affordability,
) \$ s% @' O. y$ ?' t+ S; i6 mwill alleviate some of the pressure from overbuilding.
: y+ @  P8 n8 V% l; I3 @: j  S; [! mOVERPRICED AND OVERBUILT: CANADIAN HOUSING
. G# I  H4 e0 }% N/ wMARKET RETURNS TO FUNDAMENTALS
+ s0 R# C# q3 L$ JGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
- Z3 y4 d# T' N3 p5 E: O! C) ?
; U+ r( Z. P! a& z  T* ehttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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