TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  i/ Q; z" D3 f* g9 G! h/ F( @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
- Y/ V* L! a1 Q6 {  ]7 Efundamentals by approximately 9% nationwide. This
) G- A1 E, t/ C$ G) r8 doverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
' X5 d+ g( r5 E+ {6 M6 k1 S12%, an excess that was exaggerated in the past
+ C# v% }& [" t7 u* L- M7 Hthree years.
4 o( N% ]: P. C; ?By “overpricing” we mean that prices detached from
' |7 l$ ^' l5 }their fundamentals, as witnessed by a steep erosion of
3 i* O% s# l8 u- @; x6 Jaffordability. The current unwinding of house prices reflects
5 p- `1 e3 j4 @1 N- Q0 q# l5 Y  _& Gboth 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”
. y8 G0 f# K6 x& F( ?  nwhere builders accumulate excessive inventories. Although
: _/ u/ i6 h, xthere is evidence of both types, we contend that Canada’s
# `% ^2 ]$ O6 M“overbuilding” was mainly of the first type, where
; m( ]& U' u  G" H8 vhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
/ I0 T: e5 D5 B. Z* i" y7 N; b6 hWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
+ k: J* X# g) e; @means a deepened slump. This overbuilding will likely weigh
6 k3 y1 a0 ~9 m. b& ^3 k' N/ Con markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
% L: i* u6 I( Z5 j8 @4 premain choppy and new residential construction will be
0 |- g* O) h: Y4 U. R* v# V; K( L4 \dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
+ i; n* `8 g( l3 _to persist over 2009 to 2011. We anticipate that nationwide
7 t6 M4 E/ U% z- E2 C. a: `residential construction will fall further to around
  b. _7 s8 `3 H- J: O) e125,000 starts over 2009 with a trough around 115,000 units
5 q- x! `7 N$ t4 @# T; s2 [& Fin the fourth quarter.
' h& E' n$ ]) ]# w; D3 P5 ETo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
1 w0 w6 D/ n* [province. Affordability is the key concept behind home
0 ~1 y5 c8 @# t% P  T/ `values since house prices should track incomes over the
3 X3 I, o- s8 ?4 f9 T, ilong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
( F9 o/ H9 G4 i9 ~! y  j$ |To examine the degree of overbuilding, we employ a
“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
4 ?, ^- @: b! [% s; A/ A7 C: ounits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
! v/ N  a5 J! Z/ N) I7 G4 r6 K2 ?Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
) P! L0 a1 a( f7 x1 _$ \- T6 gpopulation inflows. Saskatoon, Calgary and Edmonton are
5 |+ z$ }' G. I2 d% a9 zalready witnessing surges in their unsold new homes at the
* _" `- C' j; z$ }- uvery time that the resale market has swung into strong
) R4 \! L; O& I0 Qbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
) ~0 t' U; T- {2 b) aweakness, will be singed by the downturn nonetheless.
" P$ _1 E# V2 H, v. QQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
0 U3 q0 s4 k8 m& lMontréal – but recent building has been relatively balanced,
. g- H: w& a3 H% e) ~3 P0 U$ v9 M1 [given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
8 L; Y# `) I% C& Tcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
2 m5 O  i3 u6 s3 N! k% pcondo market. Both in Toronto and Vancouver, historically
; P3 k# {5 A7 y& M2 Thigh levels of apartment-style units presently under
2 x4 R. {* f- }; J4 tconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
5 }% f" N9 f; M! a* Z4 Ccyclical factors would indicate, condo inventories could
) y  n& l0 Y, w) S' pspike severely – particularly in Vancouver. However, while
$ z, v, I( }' a* V, yresidential construction in B.C. will definitely droop, we
1 b. D% L" U! M' n; E/ Q# Kanticipate that the West Coast will continue to benefit from
0 a! u' U( C9 d9 A, ]$ m1 cinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
- h( u6 v: P. j9 nOVERPRICED AND OVERBUILT: CANADIAN HOUSING
8 o2 m6 z! s3 {8 iMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
& Z4 j) j+ z! r416-982-8063
/ ?! n5 Q% X; b2 J, hPascal Gauthier, Economist
4 O# w# t8 h* }2 h, X3 y416-944-5730
% s5 X( P- g( |1 b8 [, I$ L
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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