TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
3 D: g7 Q0 l, D" {from 2002 to 2008, unsustainable price increases drove
" P6 T' u" r1 X7 T7 T0 K, E1 Dunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
! S, y. _$ ~1 ?) e& O3 Boverpricing compelled a level of residential construction
& a! z$ P3 E  \$ \' E6 h1 {that 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
5 P2 O1 z" d. P0 p, btheir fundamentals, as witnessed by a steep erosion of
9 l: ?# D6 c& a7 p  L2 Zaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
( U! }  J1 o* n1 ~We consider “overbuilding” of two forms: “demanddriven”
4 B, @$ N( x5 r& Q% i4 q& Pwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 V) o( f& ~" L1 Awhere builders accumulate excessive inventories. Although
. ^4 \; u9 V. i; E; ^& ?there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that 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
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
( u: Q0 U' ^6 F+ v1 f/ Efrom the cyclical downturn, house price growth will
# i, g2 b% F( I+ L6 l* U, J0 Qremain 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.
To 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
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
! n7 G* ~: x8 S& G/ h4 I- T% OTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
- Z' y3 Z' a9 Y2 c8 P6 Voptimally. 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.
$ u) x/ O' {5 v, R7 a( _. zRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
  N! `: y  m2 r  e9 ^already witnessing surges in their unsold new homes at the
5 _# ]. j. w+ e3 ?3 Tvery 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.
, P" P% P4 J7 r% J( K% xQuébec shows signs of strain – especially given the
8 V8 U& J, y# Rstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
% C5 y1 |: ^. O% T% [5 Z, K3 H. G6 J* [cyclical downturn, the degree of structural weakness appears
6 A/ K  }# U* B  o, H9 Nlimited – with the important exception of the Toronto
8 @9 |$ B+ f+ B$ ^6 y- y7 Rcondo market. Both in Toronto and Vancouver, historically
6 k- w0 h+ P3 d2 c( ~) m' Hhigh 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
residential construction in B.C. will definitely droop, we
# c. e) ~7 Q* D7 `0 Vanticipate that the West Coast will continue to benefit from
3 `  z9 i# a3 ^  s+ I' ]inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
# f3 R9 I7 c* hwill alleviate some of the pressure from overbuilding.
  D" Y( p  {) \- B, c+ zOVERPRICED AND OVERBUILT: CANADIAN HOUSING
' z6 |) b: i, K$ n1 w, ?- @MARKET RETURNS TO FUNDAMENTALS
6 H+ n" b3 d  j! JGrant Bishop, Economist
416-982-8063
  X- V. F* R1 CPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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