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
3 {" \# G" A4 h  }prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
# h# O! `" k$ s3 tthat exceeded its fundamental-justified level by approximately
' P8 w* g) O$ j4 _6 k6 W1 i12%, an excess that was exaggerated in the past
three years.
  h& n  e$ @% G' ~+ XBy “overpricing” we mean that prices detached from
2 C. q! h7 g6 ?: K. d1 f6 ktheir fundamentals, as witnessed by a steep erosion of
0 ^8 k2 o4 V+ T) m$ F2 Waffordability. The current unwinding of house prices reflects
* i7 }8 i8 P& _# G! P8 Tboth a cyclical downturn and a return of house prices
1 O8 u/ g1 d- g2 [to fundamentally justified levels.
; S, X9 H- H. ]2 c7 sWe consider “overbuilding” of two forms: “demanddriven”
9 Y2 t8 l0 p' X2 y( a% ~where homebuyers buy up too many houses and
+ z( X6 ^9 n* gthat this demand cannot be sustained; and “supply-driven”
& f. b, E* I. Ywhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
( v' S5 {8 a8 {" ?) G4 I# ihomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
6 k# b8 v  U' v5 f) jthe 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
2 u6 ~' J5 n# E8 Gfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
  Q; q. ?2 F" o7 s/ j) t4 D- _dampened, owing to this structural weakness. Construction
1 T4 ]/ x: V) u) f1 gis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
# J0 T$ Q4 v. X! g* o# q8 x( Yresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
" x0 d' E" `+ d2 Pin the fourth quarter.
9 Y0 r; J. T* }9 d% tTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals 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
) e9 e( R. U6 J5 U$ g" ]long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
8 J, \. E+ }  Z. Dof residential construction.
7 K8 g3 V6 M5 P( o. KTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
, u4 X$ x( f4 |) a5 `) }5 }; {would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
/ d& h' p. H- ^5 }% l; Dunits were being absorbed, homebuyers simply bought too
5 d+ Q6 Z1 X+ ^many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
# P8 s8 L! O# [population inflows. Saskatoon, Calgary and Edmonton are
6 {. ^1 ~; i, l: D5 m; b2 Calready witnessing surges in their unsold new homes at the
; @3 R# [; U$ A3 Svery 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.
! H0 @( q, _, {% w/ wQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
4 R: s/ v# s. i) u: kgiven 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
0 Y% H1 v0 r1 j8 L8 h6 i, j; Qlimited – with the important exception of the Toronto
4 G+ Z5 u2 B) d. s$ Hcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
# O% p9 F( X- G2 econstruction mean that record numbers of condos will
- |  c' |& I) Z4 K3 v6 creach completion during 2009. If absorption rates fall, as
7 v7 v( X% L- I8 lcyclical factors would indicate, condo inventories could
. d% V$ K1 r1 Q7 dspike severely – particularly in Vancouver. However, while
1 f% [! ~; v- ~& ^" xresidential construction in B.C. will definitely droop, we
5 N/ a; S1 n6 I6 L8 x/ I6 b5 I# N3 _anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
" u# p4 h, q7 {8 }# T7 W+ X0 `years, which, along with improvements in affordability,
4 @8 ~+ c$ O) t# B4 R0 s9 [% b5 x' mwill alleviate some of the pressure from overbuilding.
) \# g+ i6 y9 O7 @7 E8 [1 b6 yOVERPRICED AND OVERBUILT: CANADIAN HOUSING
4 J8 M  _7 o" |( i0 q' T, fMARKET RETURNS TO FUNDAMENTALS
2 p. E+ E& @( e6 hGrant Bishop, Economist
416-982-8063
1 x. b8 z7 u; _' q1 \0 VPascal Gauthier, Economist
416-944-5730

& a6 Y8 Z# K, V) z: fhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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