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
4 p" v3 G2 ^* g5 ?7 H7 o6 ^prices exceeded the value of housing that was justified by
2 @4 s& [) D/ a/ V2 Z# \2 m, efundamentals by approximately 9% nationwide. This
. T) V# o; M8 X2 c8 q4 D  `6 @; Xoverpricing compelled a level of residential construction
5 l; {7 O  `1 W1 o' T( Dthat exceeded its fundamental-justified level by approximately
0 {+ V2 j# F) q# _9 v5 |12%, an excess that was exaggerated in the past
& w1 ?) F5 z. U! N4 W9 k$ R7 {) fthree years.
By “overpricing” we mean that prices detached from
0 A  G$ o6 [; v0 Vtheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
! f7 j$ W, N  v! x1 ^both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
- S/ e6 D1 n( d) Z4 Awhere homebuyers buy up too many houses and
; D3 c" q0 V! \/ |: Y7 ?' z" p5 _+ i9 ~that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
" s9 Z/ O. Z( J' r5 Rthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 K) a0 p& {* \6 D9 [# pWhile most markets won’t face U.S.-style overhangs,
( L- Z, m. w/ n: K! Kthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
" ~3 {4 Z: k5 M& P/ w! ^on markets over the next few years. Even as Canada recovers
& h5 Q  e( G5 O$ l- ?2 lfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
4 f# C+ ]) t5 _9 M- cis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
' k9 o! i" n" {, s2 U* X3 x- p2 presidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
  m! X7 y6 ~* P8 ]  X- lin the fourth quarter.
0 Y9 G' [' i7 e% fTo quantify the degree of overpricing and overbuilding,
2 {6 U* `) Z# c9 ^) x1 Jwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
0 t* W; D' O- E4 S) Oprovince. Affordability is the key concept behind home
4 @: Q$ l; I5 E# e- H0 e& g( B7 Svalues 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
+ {( A5 v( u$ n# s! v8 m7 a* gof residential construction.
0 T* f3 D* `# i3 e0 TTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
& F- }, q) e. J6 Pwould have occurred if housing had been priced
; y! s  A2 c9 Hoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
4 r* L) @7 g' }8 bunits were being absorbed, homebuyers simply bought too
  t+ q$ B" u% ^many houses at prices that exceeded fundamentals.
% L8 S$ ]; n+ N0 \  e5 F0 ^+ NRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
, u8 e  m- k& e9 q" N5 yalready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
+ h6 g) i7 h/ _& X/ [% x# Jhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
2 f; Y/ Z  m) d. U: w9 HQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
$ l* m5 v4 S6 \% J! `given the province’s history of under-building and low ownership
* U. p2 b3 d: y& hrates. While Ontario homebuilding will reel from a
' [1 Y" A' Y" I) ]7 hcyclical downturn, the degree of structural weakness appears
& b; A0 i) V. O4 Alimited – with the important exception of the Toronto
4 k8 B; U* Q3 `+ J1 L6 I3 ycondo market. Both in Toronto and Vancouver, historically
& Z: S( b3 Z! g- _( `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
cyclical factors would indicate, condo inventories could
) z  P. e+ b* A4 z) f+ N2 j8 ]3 Rspike severely – particularly in Vancouver. However, while
. c: y7 X  `2 w) Cresidential construction in B.C. will definitely droop, we
9 q9 c6 P1 l/ Z- M: I+ u' C* _anticipate that the West Coast will continue to benefit from
( x: c# j! F+ J) c3 L8 l' k8 f  _9 ^inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
: p+ m( Z& P& k4 R, l' o- XOVERPRICED AND OVERBUILT: CANADIAN HOUSING
2 u" h: A2 f+ w' S) lMARKET RETURNS TO FUNDAMENTALS
2 C& p1 {* C& E: B" [Grant Bishop, Economist
416-982-8063
: e- e, Y& w* _% `1 e2 mPascal Gauthier, Economist
# \$ `/ d  @+ `$ c0 k416-944-5730
* k7 ]6 _" h5 @( `
  V% T5 _  Z, K9 ?' a0 K+ g4 y* k/ ahttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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