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
7 a) X, O/ q0 }" S/ S1 E- \+ n0 runsustainable levels of building. Our view is that house
8 {: l& p' m" w2 y; J5 \" W% w* R; Zprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
% ?* ?! u! i; p, h. k% I5 eoverpricing compelled a level of residential construction
5 ?' w. c. `  K6 Q6 Gthat 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
affordability. The current unwinding of house prices reflects
5 v5 v6 n% k! ]1 B5 ~7 y" G( pboth 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
- L6 k. H. S1 a- }. Tthat this demand cannot be sustained; and “supply-driven”
& E5 f/ y0 S" _# v! qwhere builders accumulate excessive inventories. Although
+ y9 E# ^' V) Z9 T1 Tthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
7 o$ w3 M0 V7 C* N7 w  thomebuyers pushed homebuilding to an unsustainable pitch
" N' {" z" J& _2 Dthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
! ?: o) T4 S$ N( M3 F$ r* S/ m, lmeans a deepened slump. This overbuilding will likely weigh
' s  G. Y2 z) a5 B# |- t; son markets over the next few years. Even as Canada recovers
/ g5 R9 f; e! `( [+ u9 b  ufrom the cyclical downturn, house price growth will
9 y1 ~+ i" H, r# J$ |remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
% [0 D3 |# |" ]+ y5 i6 bto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
( G; e* Z( E* ^125,000 starts over 2009 with a trough around 115,000 units
! ^) F# U# i6 k/ u$ Z* D2 @' j' W6 Ain the fourth quarter.
; W+ M9 E* ^* R! u& gTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
- }* M0 h+ s2 d4 ^' r) }1 b7 [fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
1 G4 W% ~- K" Rvalues since house prices should track incomes over the
4 N& e# i8 I1 b, R7 Wlong-run. Since homebuilders build to meet demand, we
  Q8 ]8 ?, p3 B, k: S2 pregard housing prices and household formation as the drivers
of residential construction.
8 l, b' t8 ]$ u: s3 a- ^% ATo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
# U; H- z! L; v2 Y. Z2 Wwould have occurred if housing had been priced
0 k$ P% t( O* @* }  c4 n7 Z. a$ toptimally. 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.
  D: ~/ a7 u4 T9 z. a8 J; t$ A7 W- VRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
+ n) r# R$ b1 \3 ]9 ]9 T* Jalready 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
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
1 @) s' `! z3 h: k( I# ZQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
  J' l( z, J6 \+ l' nMontréal – but recent building has been relatively balanced,
& T+ ^2 v  _7 d! \5 Z# qgiven 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
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
5 S% u+ s) F2 h4 q; ghigh levels of apartment-style units presently under
. V4 w# d4 X% Q; U2 G& c/ N8 `construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
: e& Y  N6 E/ H  p* h# Zcyclical factors would indicate, condo inventories could
2 p/ |# Y# Y) n. V$ `7 j0 Xspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
9 [5 F4 S+ o3 f% p/ h  y! Q% Janticipate that the West Coast will continue to benefit from
9 [. i6 n) G, t) a9 ?inter-provincial and international migration over the coming
& l# H$ x+ g- P) Qyears, 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
- n1 Y, F) o  F0 [416-982-8063
Pascal Gauthier, Economist
416-944-5730
$ a+ K6 }4 P- t4 F9 c
& B* z0 Y) T/ Y6 t6 w1 Ohttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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