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
! @* i/ Z2 g- Vprices exceeded the value of housing that was justified by
9 l* o+ Q7 t. ~8 [$ e9 ]  Vfundamentals by approximately 9% nationwide. This
) x/ a/ }; d' y& `% eoverpricing compelled a level of residential construction
; ^: V1 ^/ Z! F( y. V, ^: C% Lthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
: E5 I0 S- _2 z( v/ maffordability. The current unwinding of house prices reflects
6 c% i8 B8 e: c+ v& ?9 m$ Fboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
1 N5 g- @1 G  Y. E+ k  d4 [' i7 `We consider “overbuilding” of two forms: “demanddriven”
+ }6 ]' d  U! l! A: B2 Awhere homebuyers buy up too many houses and
( u, N' y# E" M% Cthat this demand cannot be sustained; and “supply-driven”
% P' A# o: Y8 l, f7 X9 a$ Iwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
2 o4 M. ]1 V  Yhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
' |& i' t. q, I  Dthe construction of too many new homes over the boom
1 w' Z: I* P: w! v9 qmeans a deepened slump. This overbuilding will likely weigh
+ Z/ T, s" {/ {3 U% bon markets over the next few years. Even as Canada recovers
$ Q4 j3 C0 M" x3 d. B! k. ^0 Ifrom the cyclical downturn, house price growth will
7 E( T9 [" t% e9 _remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
7 C# ~. k- t1 x( ]# r$ @* |1 Lis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
. }- q# G2 R" }/ _4 N' ~residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
7 m: k! t4 {* ?) Tin the fourth quarter.
1 h' u7 ]/ P3 }) o4 ATo quantify the degree of overpricing and overbuilding,
1 J4 l- N; k4 @8 ?0 hwe first develop an empirical model, based on long-run
  x/ b: b9 }! hfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
1 @1 I$ I( h- r: Y$ a) d$ Xregard housing prices and household formation as the drivers
of residential construction.
6 Y" t" g$ W7 j4 y7 BTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
) R3 F& @( v7 A- v( kwould have occurred if housing had been priced
2 ]$ p( q# S- q7 u/ c& p# doptimally. We find that actual homebuilding exceeded this
' }" i9 b' f  _1 b. i" dfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
! [; L! {+ o6 _; E! q+ E3 Z: m& b- {where housing demand will further contract under waning
3 r! Z- u0 J8 r6 d+ ~& rpopulation inflows. Saskatoon, Calgary and Edmonton are
! J: o4 t) x* d, aalready 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
- i7 l7 O* X9 O' m" I6 \has been relatively balanced but, while not plagued by structural
8 x0 D6 B) D' m6 m% Z8 U, Kweakness, will be singed by the downturn nonetheless.
) {* E  B1 \4 \7 {9 BQuébec shows signs of strain – especially given the
5 A2 _$ H% a; w3 p0 q- }6 b0 tstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
! j7 j: o2 J8 b# o* o, e6 P; L! E* Erates. While Ontario homebuilding will reel from a
) S8 [& M0 X) U8 j. Vcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
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
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
' N6 I" A# x" e1 b1 G$ l7 q) E7 lanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
1 f6 \/ k* ?% s) S2 _, i. w7 h  rwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
7 L" n3 s, ]; k. v5 h416-982-8063
4 y! t$ t! s. @7 g* |6 ?Pascal Gauthier, Economist
416-944-5730
7 o2 a! t$ w8 F5 s
6 J% L' I9 Y9 G: jhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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