TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) W: z8 S" c4 q; R8 Tfrom 2002 to 2008, unsustainable price increases drove
# A. r2 V9 ^- M  l& Q* F+ Ounsustainable 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
& C* L, y" \9 H* C4 R8 \that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
* p# q6 m& x% {# y) v( l! T: O, M  sthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
% {' ~( I3 ^% R; k, Gto fundamentally justified levels.
We 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
+ u# R% M" Z6 `" T& Ithere is evidence of both types, we contend that Canada’s
$ I, O4 W% f5 f“overbuilding” was mainly of the first type, where
' o& B- b/ P. Z8 `1 `- ohomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
8 C) `- t( B6 Othe construction of too many new homes over the boom
8 \, O  o% k& w; n3 d7 Bmeans a deepened slump. This overbuilding will likely weigh
5 M+ a- h* Q9 t8 Bon markets over the next few years. Even as Canada recovers
7 a" p# K1 M9 N; T5 E: lfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
, g1 H$ b: \% `" Y# W* `4 D9 rdampened, owing to this structural weakness. Construction
! l- K$ C3 n( E" b8 cis now undershooting fundamentals and we expect this
- x. N  Q: T2 N8 u1 mto 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
& [7 X- e% d2 e8 l, u  S/ T& Iprovince. 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
- w% f' z; q+ C* F8 }6 V( Y2 Y9 I2 eregard housing prices and household formation as the drivers
of residential construction.
2 Q# ]- S5 r* v7 u; z. YTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
+ \; \0 Q0 G3 ]1 T1 Qunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
9 N, j* u* z, K% rwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
; K4 K+ ^8 u- W. ]already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
  {  W- A( V$ ?+ }) T( {buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
; N6 S8 z6 a+ G$ B/ h7 n: V: s) Vweakness, 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,
4 B$ F2 z1 K8 `& f, ^given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
! V$ s7 k# J$ V! w4 }1 k: rcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
- T. U. _) S( i: r! ?condo market. Both in Toronto and Vancouver, historically
$ }! J, M7 R3 ^& ~4 B/ phigh levels of apartment-style units presently under
# h) n, n: }8 _$ P4 f4 A! `: E1 m5 kconstruction mean that record numbers of condos will
0 `: y& J* S' h& c, L" F7 R3 @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
: y; ^4 z! g. @* F; [+ c" Eanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
8 J% n5 I, W; i9 M9 z' e# Iyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
8 o( w( p) a) I5 `3 DOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
  M4 w2 j! u& @5 h3 X7 _Grant Bishop, Economist
# `( s  F: {8 K. E* j/ N& P416-982-8063
Pascal Gauthier, Economist
% c' Y) C) x5 _. ^2 j4 j4 X. f416-944-5730
1 d! M. m5 V3 x0 H! v
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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