TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
, g4 m! X  V( J2 Sfrom 2002 to 2008, unsustainable price increases drove
7 O1 U2 M! y  T; Gunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
1 I2 S7 ?. C3 `, M8 Ufundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
0 r  i$ M$ _& D. s) d7 \9 i- lthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
1 l6 N2 W5 W. W+ U5 q0 g! H, Z9 R2 wthree years.
0 L0 E4 F" h' N) IBy “overpricing” we mean that prices detached from
' G2 ~  W5 x$ r1 X6 b& Gtheir fundamentals, as witnessed by a steep erosion of
9 U8 G- |, o5 }+ ?affordability. The current unwinding of house prices reflects
" u, Y* e5 F, l3 w- D+ U' \both a cyclical downturn and a return of house prices
to fundamentally justified levels.
- x6 O% q; o3 ~. [4 MWe consider “overbuilding” of two forms: “demanddriven”
- u# F% y: v  h! e; hwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
" N5 I+ w3 P2 x& d4 }: qwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
% P* X5 `8 Y$ z+ w! a“overbuilding” was mainly of the first type, where
3 G; j' Y. u+ l$ f9 d* Dhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
% ^3 t) K$ S. k: I1 V7 }- |the 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
from the cyclical downturn, house price growth will
! q. C6 s# z! Y1 }remain choppy and new residential construction will be
( I( G1 u& N  A7 pdampened, owing to this structural weakness. Construction
' @; o9 y' b7 l* {& Vis now undershooting fundamentals and we expect this
  s4 g/ L% j+ ]# j+ H: p9 Jto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
) M9 A' [4 `1 ~/ f0 [; }  {125,000 starts over 2009 with a trough around 115,000 units
5 m8 ~8 J% ?& b8 I" Z' n' Ein the fourth quarter.
To quantify the degree of overpricing and overbuilding,
2 l3 X7 O  [( [/ M" [1 ^we first develop an empirical model, based on long-run
' V$ \# ?- s6 Z( }fundamentals of house prices and housing starts in each
+ x; y5 w: v% k9 x2 oprovince. Affordability is the key concept behind home
/ T1 W$ D6 x+ @6 Y- u0 B1 Uvalues since house prices should track incomes over the
5 Q; Z; l& p; H5 h3 \( B/ jlong-run. Since homebuilders build to meet demand, we
* b. P& p# Q, ^% Y% o: q' iregard housing prices and household formation as the drivers
of residential construction.
; h* ~! L$ a8 d) ]7 U( TTo examine the degree of overbuilding, we employ a
  H! q$ H2 a) Z, |% K“counter-factual,” asking what level of residential construction
# U1 ]& P- V( f/ {' |5 G% x# U. O, Twould have occurred if housing had been priced
. f% N4 P& {' Yoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
( Q9 B5 p& q0 g# m' y* V  q1 Runits were being absorbed, homebuyers simply bought too
( f6 N& b/ L' Y- ^4 ~many houses at prices that exceeded fundamentals.
% n" q, `5 J; H2 Y, V2 t; SRegionally, we see the greatest strains on the Prairies,
8 N! ?9 _: @: K2 lwhere housing demand will further contract under waning
0 `! E$ I% n7 x  h; \population inflows. Saskatoon, Calgary and Edmonton are
already 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
- _# R. F* B  S* c6 w/ G; S8 }has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
4 _2 r: c  ^7 D8 Q' m6 tQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
: u1 V5 H# ^4 hMontréal – 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
/ _+ L' k0 ?* @. }! x8 `cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
" W" f) s0 @2 T3 B) A5 Zhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
( }8 l9 U; _8 t. Z* U/ Zreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
7 Y& d7 U* b4 b- q9 ^! s& Dspike severely – particularly in Vancouver. However, while
) r' h* n" O( {7 h8 u* eresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
: X1 n5 \9 v8 ~' T4 y# ^: binter-provincial and international migration over the coming
* b( |( E/ B3 tyears, which, along with improvements in affordability,
7 ?$ b, o& c; ^1 Xwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
, H: t/ y& H. p. g# x& G: jMARKET RETURNS TO FUNDAMENTALS
! g; N* [6 _6 @# y4 }7 AGrant Bishop, Economist
. l! B4 r0 k3 w: h416-982-8063
; h% ]7 B) d* X$ gPascal Gauthier, Economist
2 Z2 \8 i( O2 O. @7 n7 p+ [! N416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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