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
7 a" |( U' w" I8 p- F/ o: ?3 p7 kunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
9 A- P( x: `: }5 Gthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
/ k- Z; @8 f; [' jthree years.
' E9 |2 y! T- _/ ]5 J# A; `$ YBy “overpricing” we mean that prices detached from
/ p0 i1 a9 S( n) w  v$ I! |their fundamentals, as witnessed by a steep erosion of
9 N  C+ f. O9 saffordability. The current unwinding of house prices reflects
4 w4 T4 V5 ?  aboth a cyclical downturn and a return of house prices
: g  u; l2 }$ R. j0 |to fundamentally justified levels.
9 n1 x# ~% D6 iWe consider “overbuilding” of two forms: “demanddriven”
0 _9 s. v6 j5 w! k' |( Cwhere homebuyers buy up too many houses and
' ^: \9 [5 Z# o6 l* Q0 \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
“overbuilding” was mainly of the first type, where
& L' u! j- r( ohomebuyers pushed homebuilding to an unsustainable pitch
: q, b: |& \2 g* r% C! sthat is now being rapidly reined in.
; w9 k: @2 K" J4 d- WWhile most markets won’t face U.S.-style overhangs,
3 \( Y9 x: H) D" Lthe construction of too many new homes over the boom
2 x# J- S8 G' p( K! r8 ^. q8 Emeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
+ z- h/ i0 R. }0 E- {0 A8 Bfrom the cyclical downturn, house price growth will
0 }. m$ w, H" _) G& oremain choppy and new residential construction will be
7 T6 ^4 j  [1 _/ @4 k" b- jdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
  [4 C0 U5 t0 a5 U) ?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,
) {( a7 r  Q: d, y3 F4 Pwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
/ K. k3 e, _8 i2 Z9 y, r' e. c7 `province. Affordability is the key concept behind home
values since house prices should track incomes over the
: n& b% Z8 l. f4 p& c- ?( llong-run. Since homebuilders build to meet demand, we
* n% h" @" {  M! J! |8 gregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
/ A' D$ B' z+ A& @/ goptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
8 o  a/ L; \% B9 _8 }) [7 Sunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
; J2 Z* F! j6 C: m# u/ Mwhere housing demand will further contract under waning
/ [- V7 D7 @! e# ^/ Q5 \8 C+ i, Npopulation 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
( i' R$ }# c" x  L- x, q& F' ibuyers’ territory. Homebuilding in the Atlantic provinces
/ A) a6 l7 v; Z8 ^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
. y7 e" W& A  x) l2 Y+ g0 g: Tstrange 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
8 ~+ J4 c2 ]2 ~& c, \8 r1 Hrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
  T# M1 R3 n$ u, b" w& z1 ~- k- Tcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
8 g1 `% X8 Q0 B* v" H! U( Iconstruction 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
1 e0 X# k9 c1 s- k5 O" Banticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
5 [% u& q8 r! \: i/ _- qyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
; N$ E0 X: @2 Y. H( j) xMARKET RETURNS TO FUNDAMENTALS
; K0 [& \8 G+ ~4 ZGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
( X7 F9 m' O6 ?8 _) Y& v416-944-5730

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

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