TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
  E- m! X; h0 @from 2002 to 2008, unsustainable price increases drove
# d7 L# L5 x. U5 o* _+ y2 ~! Yunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
3 L& E. {  r$ \4 X% y% b7 J$ B7 Moverpricing compelled a level of residential construction
$ W/ W" ]8 y  `9 H2 L0 U( W, `1 v) ~that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
& |; G; J3 u9 jthree years.
By “overpricing” we mean that prices detached from
3 I5 G3 d+ K3 l8 ftheir fundamentals, as witnessed by a steep erosion of
2 I0 w, J7 {. g) f2 `affordability. The current unwinding of house prices reflects
; h4 W6 e" t# E; dboth a cyclical downturn and a return of house prices
4 I- A! F* s: F( {1 k; ]6 {3 Tto fundamentally justified levels.
$ B( L0 u6 x) a3 Q+ |) y' f8 IWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
+ u. o3 D4 ^- `5 W' Kthat this demand cannot be sustained; and “supply-driven”
) P3 j0 c9 `* |6 t% `3 Kwhere builders accumulate excessive inventories. Although
2 h* {; H% ?2 D, ]+ dthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
1 f: ~- p& \3 _: M/ Ahomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
& c: p. t- e0 ]8 i' T. Ethe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
" c1 R0 ~9 a- o! [1 |from the cyclical downturn, house price growth will
9 B, Z6 [- O9 P9 J& v+ z, |1 hremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
) d& L. o7 {8 i1 m1 Y+ \% Ois now undershooting fundamentals and we expect this
& [( W( W1 B6 {* `# m8 oto persist over 2009 to 2011. We anticipate that nationwide
3 ~6 F1 V$ v1 h  G2 s: d+ J2 S8 [: lresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
, B' d- e" t, o2 B' Y# J3 |7 i( ZTo quantify the degree of overpricing and overbuilding,
  A+ M3 a; m* b( J. Rwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
* [) U6 j" ^5 j! S1 u8 iprovince. Affordability is the key concept behind home
$ U; [5 S8 c9 B$ w: rvalues 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
of residential construction.
: n) b; @. K" x7 |$ U. c9 f% u" VTo 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
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
+ J3 |9 f. S. N+ Z3 ?* Ewhere housing demand will further contract under waning
2 f! P& \0 R9 N# _# ^7 Cpopulation inflows. Saskatoon, Calgary and Edmonton are
9 M7 D; l- l  M/ Zalready witnessing surges in their unsold new homes at the
! d' y. B% @3 R, x) ?* zvery time that the resale market has swung into strong
  i5 G3 [. f% d0 @+ Ebuyers’ territory. Homebuilding in the Atlantic provinces
+ y' i8 b" ~& y, G) {has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
3 x0 F/ C, G) w+ bMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
' e, l% I4 O8 z! }9 L( j0 B! i% B3 I$ olimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
( d( {1 c* J/ x! ]/ d% k  j9 hconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
% @* j2 S! @; v) q! rcyclical factors would indicate, condo inventories could
$ I' \: j7 R2 L" ]" `$ g1 k$ `$ Sspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
+ T2 V, r/ I( }9 oanticipate that the West Coast will continue to benefit from
7 s. e+ z# T& X4 l2 [inter-provincial and international migration over the coming
: P6 y3 w7 R. }$ Xyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
' q! {7 v* @, ?# p7 p# VMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
7 w1 f' A! {9 ?' C/ c416-982-8063
Pascal Gauthier, Economist
! O; w; |% F) `  F) b- d: A416-944-5730
+ S4 Q7 R  m8 s
: B4 E$ x) P! J9 O- @) xhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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