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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
' q, I3 j5 O/ [9 ~  P! T# W( sfrom 2002 to 2008, unsustainable price increases drove2 o0 l' ]2 T( W9 x( ?0 w& s' }1 H
unsustainable levels of building. Our view is that house
* _* |; ^+ h" d/ ^5 i% R- pprices exceeded the value of housing that was justified by
4 m/ z" G0 q. efundamentals by approximately 9% nationwide. This, y$ j- l4 V* {* L/ ~) L5 r
overpricing compelled a level of residential construction
6 H0 P+ ?% D$ d6 n0 Athat exceeded its fundamental-justified level by approximately5 u( w0 v+ Q/ Y1 u8 f9 Y
12%, an excess that was exaggerated in the past
; S! n0 p! g1 Y8 D' [' vthree years.
" H3 X- q: v6 J% J, U; V0 O) L: |8 jBy “overpricing” we mean that prices detached from+ v+ k$ G- G+ W* F! ]
their fundamentals, as witnessed by a steep erosion of7 W( f2 U% @7 k6 \- _! f
affordability. The current unwinding of house prices reflects$ J' R: v* p- P! E, q+ e
both a cyclical downturn and a return of house prices: H& G) J( J) [* N0 k
to fundamentally justified levels.5 P. H  K% N7 T" m0 X# l6 @2 ]" t0 O
We consider “overbuilding” of two forms: “demanddriven”$ A# d& K: m6 O; c/ e
where homebuyers buy up too many houses and
& Y% o( v* ?( p7 ~& R$ c+ kthat this demand cannot be sustained; and “supply-driven”
" K7 }; u, q: j. _! Z1 a1 u( Mwhere builders accumulate excessive inventories. Although: z; G* }* H2 P3 n
there is evidence of both types, we contend that Canada’s1 [/ w% b# P8 V0 D, a: Y' V
“overbuilding” was mainly of the first type, where
8 j# C9 D) R: Rhomebuyers pushed homebuilding to an unsustainable pitch
  }! P" g0 ?2 }  Y" }that is now being rapidly reined in.( C# x2 S' i8 u+ P6 f6 K8 G
While most markets won’t face U.S.-style overhangs,
+ H5 W1 L- P5 k+ Y  qthe construction of too many new homes over the boom! u" f% X( @# C( J& y. t6 t8 ]5 n$ b
means a deepened slump. This overbuilding will likely weigh; B. ]5 ^" N/ P" ]" `, N- I6 i, {
on markets over the next few years. Even as Canada recovers
! O& b% F7 g' E% |9 n9 afrom the cyclical downturn, house price growth will
7 j' U- ]- D3 {0 dremain choppy and new residential construction will be
. Y2 R) l. Q4 d; _dampened, owing to this structural weakness. Construction
. H0 Q& O7 C( ?+ Q: x1 F5 S0 Q, bis now undershooting fundamentals and we expect this) R& D/ X& K5 X) H
to persist over 2009 to 2011. We anticipate that nationwide4 t8 U  E8 W" F7 n
residential construction will fall further to around
* c* Y7 m+ k3 t/ d- l/ Q% R125,000 starts over 2009 with a trough around 115,000 units: O. K, X/ }4 [2 v
in the fourth quarter.
* b8 f1 ]  I- P5 L# B5 xTo quantify the degree of overpricing and overbuilding,
- P) Y0 u  V% U. u' Pwe first develop an empirical model, based on long-run
9 H4 A7 g( o# a6 u& Hfundamentals of house prices and housing starts in each0 T  [5 V% `, N8 w; r" @( K0 J
province. Affordability is the key concept behind home
) W$ m/ h3 }' p+ `6 m5 fvalues since house prices should track incomes over the" E9 v) l5 A2 w: ?* w% b
long-run. Since homebuilders build to meet demand, we! U$ S  J1 J" I& q4 A  ~' @6 C: I* a
regard housing prices and household formation as the drivers' [3 I; I. }* F8 v3 ^  y, g1 x
of residential construction.: [" O7 {9 x- C5 E( [; }
To examine the degree of overbuilding, we employ a
& S1 T( I/ @9 n  v“counter-factual,” asking what level of residential construction. R$ u$ B- I8 k9 P' d1 j$ a
would have occurred if housing had been priced/ {% A1 i! m6 c1 k) p* L. L; |
optimally. We find that actual homebuilding exceeded this7 p. J. K/ l0 J0 \0 k$ ?6 z5 B# O
fundamental-justified level by about 12%. Although new; U$ N7 i6 _( |, `7 ^) n
units were being absorbed, homebuyers simply bought too  d9 _8 ]; s2 h& `# d
many houses at prices that exceeded fundamentals.
5 _0 T% }3 o% L% [- f8 xRegionally, we see the greatest strains on the Prairies,; E) m9 k2 D3 s# b6 T2 I
where housing demand will further contract under waning
! F# ^: |9 p/ X+ f: xpopulation inflows. Saskatoon, Calgary and Edmonton are7 d* e5 a5 q0 u: j2 `1 w
already witnessing surges in their unsold new homes at the; V3 K3 z, p9 `* [3 S3 {0 Z/ i
very time that the resale market has swung into strong; ^4 `( A/ ^  H: D+ l
buyers’ territory. Homebuilding in the Atlantic provinces
2 D; J5 \+ j% b/ t: F/ \) O+ Yhas been relatively balanced but, while not plagued by structural+ I. T2 W" B+ C- d! p; s
weakness, will be singed by the downturn nonetheless.
! O9 J5 E4 d9 v. Y3 B$ A9 s2 b1 KQuébec shows signs of strain – especially given the
9 i, \+ A' u- \8 e, K9 Zstrange accumulation of unabsorbed multiples on l’Île de( Z8 \, ^, Z! i0 x0 s( F+ l
Montréal – but recent building has been relatively balanced,
% o5 j- B' X) |3 a; b" _given the province’s history of under-building and low ownership
4 X6 |* B2 l. d: {7 |. D2 @( Crates. While Ontario homebuilding will reel from a# R' Q) C# I- z  ?/ w& f
cyclical downturn, the degree of structural weakness appears, N  L9 A8 \" z5 E7 }% A
limited – with the important exception of the Toronto
# Y  S( P+ u' X" j7 n! _$ M$ Vcondo market. Both in Toronto and Vancouver, historically
/ d& y3 v3 ]. f8 c. V0 vhigh levels of apartment-style units presently under2 D' t: m* j6 P! L  d4 z
construction mean that record numbers of condos will
' Q3 c! S+ b: N; I" i0 rreach completion during 2009. If absorption rates fall, as3 q7 e! v8 e; f7 O
cyclical factors would indicate, condo inventories could, ^" y9 l6 E6 ^. l: o  q
spike severely – particularly in Vancouver. However, while" }6 d. e  E  P
residential construction in B.C. will definitely droop, we; m7 o% I; T" e
anticipate that the West Coast will continue to benefit from3 x6 v# H' R! m+ q' s- z1 A
inter-provincial and international migration over the coming9 g' E) Z: n. z5 ~$ E- C0 _
years, which, along with improvements in affordability,
4 _, E' L- S" e" ~  B8 }will alleviate some of the pressure from overbuilding.
1 t$ C. \0 H' y; f4 WOVERPRICED AND OVERBUILT: CANADIAN HOUSING/ Q9 _' s+ P/ N( C# X
MARKET RETURNS TO FUNDAMENTALS
3 s0 S2 a$ ~" W- g; I; vGrant Bishop, Economist$ f1 Z7 ~6 Y' q! @% p
416-982-8063
( k( a3 I3 r+ Q) z( A5 W2 jPascal Gauthier, Economist' _2 L$ f. n) y" ?
416-944-5730
" n' i) U- a0 s/ V+ D7 ]: w2 r5 C! c' |9 F. B
http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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