TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
1 {2 K& v7 M' W8 o1 \from 2002 to 2008, unsustainable price increases drove
& S( U0 Q4 j( Y% junsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
% i6 d5 {- M3 X8 F0 u" voverpricing compelled a level of residential construction
& H+ |0 L; y8 j' hthat 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
3 d2 B! h& f( S7 E! y: d5 Ttheir fundamentals, as witnessed by a steep erosion of
  Y  A6 }! c. E$ g: eaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
/ m3 r8 n* p  d- i1 H% mwhere homebuyers buy up too many houses and
/ D8 Z. X5 |) ]* y$ M4 |" |: J$ fthat this demand cannot be sustained; and “supply-driven”
" d0 a" A: H1 C- N9 E+ Bwhere builders accumulate excessive inventories. Although
: Z  \7 V5 m! ]3 o5 M( H. qthere is evidence of both types, we contend that Canada’s
. `# @/ z, d* D% |  z' `9 F“overbuilding” was mainly of the first type, where
& Q/ e$ g- H8 u! x9 K8 u: ^homebuyers pushed homebuilding to an unsustainable pitch
: X, ?+ g3 @& h( kthat 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
+ d, I! Z; T. K( K) Zmeans a deepened slump. This overbuilding will likely weigh
! O4 K" c% Y) M, F9 jon 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
1 y7 J* [" i8 V  z& S- B. q. I% \is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
2 A  S  [. U2 X& E. Y6 z# ?residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
, R# m  t. M& a9 w0 h! f7 ~in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
6 C0 R! ^) h) T( X! v9 fwe first develop an empirical model, based on long-run
7 m& V; u8 ~+ M1 T" T+ x* cfundamentals of house prices and housing starts in each
( ]' ?* l( k$ M, Fprovince. Affordability is the key concept behind home
, _" W* \0 A# Z' A, [) k4 _values since house prices should track incomes over the
* ~4 e! m' }1 w+ Hlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
; j2 Y" |, V% o# |of residential construction.
: e+ J1 P- C6 j1 \$ S& B9 K( @: |To examine the degree of overbuilding, we employ a
! M5 o# X6 v3 [7 F2 M“counter-factual,” asking what level of residential construction
& f- c" Q0 R  g  l0 d. x$ nwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
) K. x3 u, ^1 G7 amany houses at prices that exceeded fundamentals.
  D2 f8 w9 w! h) |$ r- ]+ Y. Q0 s9 KRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
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
6 D: F2 }  X4 Bhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
7 V3 ?$ \' c) [( b  SQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
0 }9 Z/ G$ T1 J! E5 ~! tMontréal – but recent building has been relatively balanced,
0 p6 \$ K( E0 v2 [given the province’s history of under-building and low ownership
% T0 l1 f3 N2 O3 l+ hrates. While Ontario homebuilding will reel from a
: m& ^* e. |8 S, Wcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
# q% b6 w8 o" l! econdo market. Both in Toronto and Vancouver, historically
- g( [# x. ?$ N1 @0 Rhigh levels of apartment-style units presently under
( J( x8 B. q) r8 V: ~6 l/ aconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
7 L$ p* f5 E$ f5 Cresidential construction in B.C. will definitely droop, we
7 ?) c5 [. d( a) p* Qanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, 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
416-982-8063
  E# `) q/ `  A0 H, H  H& q( bPascal Gauthier, Economist
416-944-5730
* c$ o% `# r- g. r0 _# ~1 T
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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