TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
/ ~5 w1 x5 U1 R$ v+ z# \from 2002 to 2008, unsustainable price increases drove
0 _5 j# E  |  n# f$ }  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 g0 p6 G+ t% y; g7 ?% N) yoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
5 y$ v: G6 p4 `; L; [7 qthree years.
- ^. G) U6 ^3 ^% y6 Y) IBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
6 q; \6 J6 `. Taffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
1 i$ [' `: F( F2 d5 Q# a" p' e" c4 ~We consider “overbuilding” of two forms: “demanddriven”
1 i( a7 R+ Z8 \1 d4 L; ]where homebuyers buy up too many houses and
& U( _! K9 j( K( S! f3 Ithat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
4 r# e* E' X, z) ^& L4 i& Dthere 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.
* M; Z6 b, o% e2 U2 Q1 tWhile most markets won’t face U.S.-style overhangs,
2 V# S( V0 y0 C0 Z  Ithe construction of too many new homes over the boom
" e3 I' w, Z8 |( Pmeans 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
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
7 [' u  Q! d: ~/ C' e+ D2 U: mis now undershooting fundamentals and we expect this
; a  J( t; `. E5 oto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
% }9 ~2 q1 y! z& m125,000 starts over 2009 with a trough around 115,000 units
  _" V5 z3 Y* {in the fourth quarter.
# |4 X( {6 y: j) C+ DTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
% \9 b. O+ D% `2 M: `5 @( lfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
# K3 G* C4 x, G% n, Y( hvalues since house prices should track incomes over the
+ |$ @! ]8 ]' l. R) s* R8 n, B, rlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
0 c0 j1 c1 u7 {: |/ u# wof residential construction.
# v: ~& o, d/ s5 y* T' \To examine the degree of overbuilding, we employ a
1 ^- x" t7 i! o- x$ B“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
9 j. S) s2 q) }, _fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
* q! V) V' G2 S: P9 T1 ^many houses at prices that exceeded fundamentals.
1 M* V. |, a4 G# X0 B/ ]Regionally, we see the greatest strains on the Prairies,
: r* o! ]" W% }; Y$ V4 Xwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
/ U4 \3 o, V" R4 nvery 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.
Québec shows signs of strain – especially given the
strange 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
rates. While Ontario homebuilding will reel from a
) f/ p9 o4 F# _! E: B4 Xcyclical downturn, the degree of structural weakness appears
: C! e! O) o4 g2 Rlimited – with the important exception of the Toronto
; R$ f9 T0 [& Icondo market. Both in Toronto and Vancouver, historically
8 K1 _. ]# j5 m) n& Mhigh levels of apartment-style units presently under
) u+ a- Z. ]) F! u) F& S- ~9 `construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
' s9 y+ C" x5 x8 J; @cyclical factors would indicate, condo inventories could
$ a& p9 e  A3 j# q6 M- ?spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
# L. w3 U: Y0 w$ ~anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
6 Z2 c: y3 k8 q/ Z/ l' h) N" P0 fyears, which, along with improvements in affordability,
9 x1 `) T' j* P( j1 f/ G, q2 iwill alleviate some of the pressure from overbuilding.
" T2 K6 a2 P2 k; x6 \1 kOVERPRICED AND OVERBUILT: CANADIAN HOUSING
3 x& ^4 Q* |* Q: AMARKET RETURNS TO FUNDAMENTALS
8 x* v% R5 N# L2 c9 \! aGrant Bishop, Economist
9 T$ l2 o% u6 M5 ]% K! n416-982-8063
Pascal Gauthier, Economist
416-944-5730

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

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