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
$ N7 q$ ?6 h9 _5 E+ G1 {: Xunsustainable levels of building. Our view is that house
3 @% S8 m; [6 ]& @$ D. U% B# X/ Lprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
( W4 w  A  Q4 J& k4 R( V! x' zthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
$ y* r" _, G/ ^+ }9 u1 E8 l  ABy “overpricing” we mean that prices detached from
, h0 }) n$ a$ D5 o% Ptheir fundamentals, as witnessed by a steep erosion of
4 Y2 U+ F3 q" P: Zaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
. M. r& P0 T' C; F: p0 @to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
; l! \: l* B5 }, b& j, X5 Owhere homebuyers buy up too many houses and
# }6 z. O# v, tthat this demand cannot be sustained; and “supply-driven”
/ @" z) f3 u+ e) T) Zwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
* M* N  i  T& Y7 |" W* P! ohomebuyers pushed homebuilding to an unsustainable pitch
% |$ s  x: \: B5 O; A% mthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
. h0 Y/ F- q6 ~" P" R; A: Y" n% q, rthe construction of too many new homes over the boom
! B! a9 _* u3 }, p" O5 w5 J# Hmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
- `2 [8 _) X6 f5 y/ C- }, A. rfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
  r8 C- |& z- s; K: b9 A3 [$ Tis 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
4 L7 d; N4 U/ g- A: oin the fourth quarter.
7 V3 R7 t, H0 I1 f4 oTo 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
4 t3 s9 U& ~1 l* t' Tlong-run. Since homebuilders build to meet demand, we
9 v7 \" g& w- F9 t, @  g. \( @regard housing prices and household formation as the drivers
8 C6 Q& s; C2 Rof residential construction.
; z, z' p( f( G; kTo examine the degree of overbuilding, we employ a
# {# y, S4 a( M$ P“counter-factual,” asking what level of residential construction
0 j- A" t; f6 l- w4 C1 v$ wwould 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
many houses at prices that exceeded fundamentals.
  z- H# C, ?- T" d+ l) iRegionally, 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
' O: I( i9 ^  avery 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,
% }* j7 \1 x3 p0 V/ i3 Igiven 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
$ t& P! B+ @5 @# l+ b0 Qlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
" F5 w: C& F9 mhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
- C/ w8 A: w' ]! h, J6 [8 @1 areach completion during 2009. If absorption rates fall, as
% i+ |( K, a& o& J9 H0 ucyclical factors would indicate, condo inventories could
1 Z2 S" f$ h! v# L. rspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
+ v" f, A' R4 o3 U) wanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
' C, x2 J7 W5 u; _" @1 Xyears, which, along with improvements in affordability,
8 w1 z1 O5 c( A) n7 @; u3 awill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
; C' D/ p6 |: p- mGrant Bishop, Economist
416-982-8063
, T$ W2 \9 H. f' X" s; bPascal Gauthier, Economist
, ~3 v' V; s. R2 l6 A3 K+ Q6 t/ k" u416-944-5730

6 F% K& S* o& m, `http://www.td.com/economics/special/gb0409_housing_exec.pdf

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