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
# ~! S2 Z( i1 D! o, X% }" g! W5 D- ?prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
8 ]' G6 Z% N: doverpricing compelled a level of residential construction
' ?$ g5 H9 y3 c$ Cthat 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
1 w. ?" u6 v+ v3 v7 Htheir fundamentals, as witnessed by a steep erosion of
& T( q) j3 ~5 ]& ^- uaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
% C7 J7 V. g) w5 j1 y/ P9 W$ lto fundamentally justified levels.
: a2 z1 G9 C3 c6 x8 {, ?4 pWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
: F$ t0 q% B3 n; b* i' K1 \where builders accumulate excessive inventories. Although
4 J+ x; F# o" r1 l  Bthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
9 _% ?. H$ l/ P, Y# e. }homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
+ c- c' ^, g+ a! yWhile most markets won’t face U.S.-style overhangs,
. p/ k. x6 M0 f  K. Zthe 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
7 L, J  C$ b8 A0 j* rfrom the cyclical downturn, house price growth will
# Z( r7 [2 `1 K/ g+ ?6 S9 rremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
$ E" K$ f5 N, \: t- H2 STo quantify the degree of overpricing and overbuilding,
* X; G# C6 w5 w2 S$ N/ mwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
9 {" ^- X+ j- k5 c4 T- Hprovince. Affordability is the key concept behind home
1 {5 G/ o7 H/ M! u. Q% ^# Q1 `1 X, Pvalues since house prices should track incomes over the
" _! E2 ^) `# E0 along-run. Since homebuilders build to meet demand, we
8 c, \- h, {. y: y  ~& ?' i& \regard housing prices and household formation as the drivers
4 Y+ _; t) |- ~9 bof residential construction.
To examine the degree of overbuilding, we employ a
3 ~* ]" `' K% w0 T" G9 g“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
* [! A7 [0 X: H; y. I3 X7 Joptimally. We find that actual homebuilding exceeded this
( i# ?3 U% S8 Z: Pfundamental-justified level by about 12%. Although new
/ }. B2 Q) M) p9 t$ u* }' b9 _( ]( H9 Gunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
" j8 L$ w4 T; Y: g3 K* {Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
! I( M0 j1 @3 Ypopulation 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
" ?  E( [, t1 j: [# ybuyers’ territory. Homebuilding in the Atlantic provinces
: s7 x6 a; C, Z, C% x, {has been relatively balanced but, while not plagued by structural
: p3 @  i9 P6 q9 n/ u- H+ yweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
7 F) Y. H5 I+ p- O3 tstrange accumulation of unabsorbed multiples on l’Île de
; X% T1 G1 y5 L( d4 LMontréal – but recent building has been relatively balanced,
% [5 H1 b2 a2 [- Z. o' f6 Vgiven 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
. u+ e; R) R- H4 J& W  Ilimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
+ t0 ]  M, u6 `% s* ?% j5 Rconstruction mean that record numbers of condos will
4 J1 Y& v0 ?, V, Creach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
/ P* {/ ?8 o$ m. Pspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
# T; W  O9 ?+ z% {+ d0 X. u/ santicipate that the West Coast will continue to benefit from
- w6 H/ y2 K, minter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
5 m+ p/ Z" m7 O( `5 Z, n' \OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
: g- J' K9 o4 ]" `- U: [416-982-8063
Pascal Gauthier, Economist
416-944-5730
  k. p# c! O- U$ ]4 ?$ k( a
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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