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
# b; R( B, \( w" g1 ounsustainable levels of building. Our view is that house
% p: p8 d. P, r, x5 Z( \# Cprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
  ~* g* D$ X- w" T, hoverpricing compelled a level of residential construction
2 f% _0 v3 d) T2 Vthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
* d7 y* H$ [5 R- w: Ethree years.
  b+ Q& u( P% N* `By “overpricing” we mean that prices detached from
( R9 d+ ^9 |% S! M7 _their fundamentals, as witnessed by a steep erosion of
$ o& G. {' |) i0 ]7 H- W4 X; Oaffordability. 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”
4 Y& k0 t; ^2 O& O0 S% p* F" `where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
/ U. s0 p, j" C: \0 ?% [& M. Awhere builders accumulate excessive inventories. Although
$ B6 }2 X, P6 r' B" ~6 X+ ~there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
+ i4 l6 K; I2 ~, S4 C$ Ohomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 A8 p4 L5 S6 @5 cWhile most markets won’t face U.S.-style overhangs,
; P* u% b. d, }5 `/ l6 f  athe construction of too many new homes over the boom
( U/ w* g# i7 I+ F9 q7 omeans a deepened slump. This overbuilding will likely weigh
2 I; T- u8 a3 P- Hon markets over the next few years. Even as Canada recovers
3 G5 P5 D) J2 I2 `4 d  zfrom the cyclical downturn, house price growth will
+ B: Y6 E# A6 x& C0 j. Cremain choppy and new residential construction will be
2 x3 ^# {) I, |0 W3 N2 bdampened, 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
' o* Z5 R& |0 Rin the fourth quarter.
( [0 e/ j) m) N/ Y2 l/ GTo quantify the degree of overpricing and overbuilding,
0 u  y' C7 V/ G3 `( d& W9 w3 twe first develop an empirical model, based on long-run
' C4 N% \! n  W* Z, L8 Rfundamentals of house prices and housing starts in each
: r" I, ?( w; rprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
3 {- F/ E+ ~! h! A3 Clong-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
( ^7 N6 B: p* ~# m! `, W“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
* B( P% ~9 M! _+ c6 q3 T- Coptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
2 |4 B3 q# O, C) M+ |3 punits were being absorbed, homebuyers simply bought too
$ S: _8 f$ r# Z" zmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
+ M; f! X# @/ v4 r3 pwhere housing demand will further contract under waning
3 h6 Q* v2 q& b8 ?' \- Hpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
* w$ P% K: }0 L1 v) W6 [buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
2 _5 F3 v2 a" P; `9 Tweakness, will be singed by the downturn nonetheless.
* C0 P# _2 D2 p8 F( ^; D" uQuébec shows signs of strain – especially given the
1 r0 d/ c1 n  q( G* nstrange accumulation of unabsorbed multiples on l’Île de
5 y" |, @0 N, F6 T9 e' x& P( DMontréal – but recent building has been relatively balanced,
7 m: \8 ~+ q/ u* g. ^8 zgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
+ e% r! }3 x5 Tcyclical downturn, the degree of structural weakness appears
( T! _6 {8 z# {2 _+ `) D+ qlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
( V. k; a+ H+ P7 W8 p# @5 Q% `high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
0 L7 w& [+ p; Kcyclical factors would indicate, condo inventories could
, P: n' b/ Q$ R2 A! S9 tspike severely – particularly in Vancouver. However, while
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
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
2 U8 H; C! p  u6 b  j6 g5 i" x416-944-5730
7 ~: m/ e  Y& n
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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