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
  D( }8 i' U- munsustainable levels of building. Our view is that house
* i( `8 c2 B9 iprices exceeded the value of housing that was justified by
( e, ^" ]% ^, @; Z) }1 f9 _fundamentals by approximately 9% nationwide. This
" f. Y$ }  n* s  ?: O/ k2 x: Noverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
1 K$ Q* U' G, ?; }5 y: ~  _12%, an excess that was exaggerated in the past
  t7 z# s6 l& _! u" k( tthree years.
& Z/ L2 W6 b2 J' v5 mBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
( B0 K+ U; Y) O" maffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
# o; \5 @0 H, p+ x0 pWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
# `: K5 u% D) g/ R. J9 i: f“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
* p3 {& x( \- h; `, f: Nthat is now being rapidly reined in.
' n  P6 S2 @, n* l: u+ H; ]/ z2 QWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
5 u) P% E8 s* V8 @! }7 H" _% ameans a deepened slump. This overbuilding will likely weigh
! |! |) g( ~+ T0 ~8 e6 ^on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
8 b) ?5 E0 Q  F3 w* p, @- I. wremain choppy and new residential construction will be
0 R( @( L: {4 F/ Odampened, 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
2 P0 s' W3 i" j/ M) Cin the fourth quarter.
6 {, N* ^. }, m$ V4 @  BTo quantify the degree of overpricing and overbuilding,
: }" x: ~. f1 n! ?we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
" Q+ F0 j9 B9 q: e# hprovince. Affordability is the key concept behind home
5 q' h+ h* Y! l$ c/ {values since house prices should track incomes over the
/ o+ A: D3 W- ]+ {3 blong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
( g4 _' z* i" m' NTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
, F$ d% b1 v( w+ ]* @% ewould have occurred if housing had been priced
( l7 V6 E) x5 J; Z4 s) Eoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
1 q! r/ H( T6 l7 G0 K8 T7 G- ~/ G1 yunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
6 G( \/ F7 \" I" a6 ]; iRegionally, we see the greatest strains on the Prairies,
. O" U& Y( P9 S6 z% S2 p- p9 u6 Rwhere housing demand will further contract under waning
$ Z: ~2 x+ |* jpopulation inflows. Saskatoon, Calgary and Edmonton are
  q' I2 W; f. {already witnessing surges in their unsold new homes at the
  M) L( U6 c& K% k7 }very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
4 L" Z# G) x: d( Q  |+ F, \has been relatively balanced but, while not plagued by structural
, A0 G3 r1 u; \$ nweakness, will be singed by the downturn nonetheless.
. ?, t( ~0 l8 a6 {Québec shows signs of strain – especially given the
. x1 K; e7 j8 [- R6 \strange accumulation of unabsorbed multiples on l’Île de
- T# C% s/ W8 y6 L' K, _, |5 ~Montréal – but recent building has been relatively balanced,
7 h3 L* m, y/ \9 C$ u! \/ z( ^given 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
! D$ B+ ^9 B* |: ]- D4 w+ Nlimited – with the important exception of the Toronto
) H7 y, q8 d/ s. X! U- Wcondo market. Both in Toronto and Vancouver, historically
& W6 r- ~& Q7 E2 y3 H% p' ahigh levels of apartment-style units presently under
construction 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
+ x; z: A1 N& Z, w% z: m1 r1 ~  tresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
" R/ ~7 J; y! ~: \. @1 y! h9 U/ Zinter-provincial and international migration over the coming
4 Q6 d7 Q  w. k& V9 j" @2 zyears, which, along with improvements in affordability,
6 c$ j* |! R7 K. Qwill alleviate some of the pressure from overbuilding.
: c% J, X9 g- t" d( sOVERPRICED AND OVERBUILT: CANADIAN HOUSING
, G: R' x4 ^9 bMARKET RETURNS TO FUNDAMENTALS
8 P, N$ Y+ n5 ~# \+ \% [7 ?3 ?Grant Bishop, Economist
6 x) T+ o# p) w" d416-982-8063
Pascal Gauthier, Economist
+ k: T# |! K" P) o9 F# i; |416-944-5730
5 W5 F$ z! [2 p
* O3 e, p- N% ?0 Lhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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