TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
3 x& `) Z" D9 m& s9 f2 f. B% jfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
% J- y8 e( z+ Tprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
+ [2 u  a6 d: Hthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
# p5 Q: n! i$ _9 i% B- \three years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
; [9 D% P  L6 c- {8 paffordability. The current unwinding of house prices reflects
. w6 F& i! D- V0 k: C0 S% rboth a cyclical downturn and a return of house prices
  |2 {! v8 P# dto fundamentally justified levels.
/ C8 L/ r9 \$ J6 [6 S: l8 IWe consider “overbuilding” of two forms: “demanddriven”
) Q. J$ ]  M1 `9 `( _& G" Wwhere homebuyers buy up too many houses and
& t7 N) L7 j2 b6 Dthat this demand cannot be sustained; and “supply-driven”
  |, x  `7 o3 q9 l1 x' bwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
; Y/ \- K8 y( c2 Y“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
! }# W. x2 q6 ^5 Ethat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
$ n1 J& \0 l& L, Q- l9 \" _2 xthe 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
) s7 N& r9 Y, Ifrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
+ n9 f& i  E! [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
4 L3 t/ I2 o6 N: f$ F! U  L' T5 d8 B125,000 starts over 2009 with a trough around 115,000 units
* ?1 m+ Y4 m$ e0 S0 pin the fourth quarter.
# b& K0 V, P* H6 I- mTo 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
5 o: a' G9 V7 X0 p! Rprovince. Affordability is the key concept behind home
2 d. a0 S" W# B6 O0 K5 y, W. y% bvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
1 ?  G& n0 B- rregard housing prices and household formation as the drivers
of residential construction.
0 x- o) g4 M; J7 v/ K8 j3 nTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
' \3 U! G5 P: Q, m- V8 ~! uwould have occurred if housing had been priced
. c; @5 p- ^% V, D3 y! d' roptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
( S* ?' f% O& yunits were being absorbed, homebuyers simply bought too
! Z/ S' d9 @% j3 X: kmany houses at prices that exceeded fundamentals.
: t1 \9 v$ k5 }* v0 g) bRegionally, we see the greatest strains on the Prairies,
2 ]6 Y# j0 l2 Twhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
  {# l+ D3 ]) E0 t8 N: [2 halready witnessing surges in their unsold new homes at the
: g7 D" N0 v( W3 q3 _8 ~  }very time that the resale market has swung into strong
2 ]6 X/ B) ~2 @, d' o& b9 U; A; Mbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
4 r. m8 {4 _' @% sweakness, will be singed by the downturn nonetheless.
5 n- X7 S% }  d( YQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
! O+ W3 w) W. T9 x* FMontréal – but recent building has been relatively balanced,
* J0 U/ }! ]! `0 Q- g5 ~given the province’s history of under-building and low ownership
/ ^, s* v$ B- ^, q+ Yrates. While Ontario homebuilding will reel from a
% X3 \6 ?. \8 X) y4 b4 mcyclical downturn, the degree of structural weakness appears
) F( p- \/ U) @* V( |limited – with the important exception of the Toronto
( D6 K% U/ d9 wcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
$ o3 L/ A: L, B( |construction mean that record numbers of condos will
+ v, I$ A+ \' |0 [- u4 [reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
9 A+ b& F  r7 u9 [$ Y& G* Q/ yspike severely – particularly in Vancouver. However, while
: H! W) |% F& g- Rresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
8 ]$ B: n; r, r8 J/ byears, which, along with improvements in affordability,
  q+ ^* a3 ^, h1 X2 C: O& g* b$ _will alleviate some of the pressure from overbuilding.
! X" F9 y% I+ ^5 @( I/ p1 k  b$ m) @OVERPRICED AND OVERBUILT: CANADIAN HOUSING
7 s2 Z/ X$ I8 B9 pMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
. v! W4 b5 D& I" T; k! i6 t# Q+ G416-982-8063
Pascal Gauthier, Economist
  d' |+ |. {$ m5 c* q( n* C416-944-5730
+ e- l; |  j9 E3 I5 N
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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