TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
, e! s7 K1 ^. }/ n8 P1 afrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
; t/ k1 ~  {+ ^5 eprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
! S. ]6 Y. y& E* M% o4 S# jthat exceeded its fundamental-justified level by approximately
" |& C' C/ [: z" H2 T12%, an excess that was exaggerated in the past
: O2 l8 r# S7 ]& [1 Vthree years.
By “overpricing” we mean that prices detached from
% c" U* Z3 V3 H7 \: A3 P8 qtheir fundamentals, as witnessed by a steep erosion of
# ^  {. N: C0 Y2 D6 ?/ |affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
0 ^# v+ m- a$ C% t! Z0 b: o/ tto fundamentally justified levels.
. d6 ^/ S: v! Y& @! W9 c, jWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
3 _* [* r. Y$ xwhere builders accumulate excessive inventories. Although
% W3 R, Z) g) `- o8 S5 i/ Sthere is evidence of both types, we contend that Canada’s
; O$ b5 g; g; h0 N8 c( n( }& }/ d“overbuilding” was mainly of the first type, where
- H  |$ a0 y+ k( O/ q8 }# Fhomebuyers pushed homebuilding to an unsustainable pitch
. A. c# A) l! D0 A, ~2 vthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
* G6 q9 o9 g6 O! H2 b8 A  q4 j" bthe 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
6 T4 k* R" o: ffrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
( D) q, Z* H2 y! B; E- gto persist over 2009 to 2011. We anticipate that nationwide
$ ~% w# A5 ~3 cresidential construction will fall further to around
+ W, Z! b* k& y6 J125,000 starts over 2009 with a trough around 115,000 units
0 x& F( }# B# r" Q( J% Kin 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
: d) |  T& c( @) ~/ Vprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
, u4 h0 N5 M$ T; p$ O( k; c( U- ~long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
. i, Y( f( P* \/ Y" Y/ R“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
. z, W3 I$ _' g7 loptimally. We find that actual homebuilding exceeded this
/ T& Z; j& |3 D0 Ffundamental-justified level by about 12%. Although new
3 k7 r) ?" U! [  \2 Q, runits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
* F7 F* y# F3 x5 ?* v, L! _Regionally, we see the greatest strains on the Prairies,
  y! M7 y$ j8 U0 `) mwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
* ^; I* y% p- c& _5 ~& zalready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
1 q0 l& I7 j( G1 }has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
7 P; d3 m8 l! N; s  R& EQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
- u2 t9 o$ J/ U/ z, tMontréal – but recent building has been relatively balanced,
( N9 T2 o4 ^8 \5 O  fgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
! ]! i0 p& n4 G; b5 Scyclical downturn, the degree of structural weakness appears
& L! K* T4 u5 M+ ~# @/ Nlimited – with the important exception of the Toronto
) E7 D: }. u# c9 X$ Qcondo market. Both in Toronto and Vancouver, historically
) p+ Y, F! D  U2 X( ]1 c/ K* r- Khigh levels of apartment-style units presently under
construction mean that record numbers of condos will
: g7 L* ~0 h; Mreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
7 e- x0 l2 b* @spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
. v* H( Y5 Y8 I# b- Vyears, which, along with improvements in affordability,
! o, x6 s+ g1 C( n9 b! Nwill alleviate some of the pressure from overbuilding.
3 c3 N' w+ j  f2 h. v: ~# b$ a9 ~OVERPRICED AND OVERBUILT: CANADIAN HOUSING
+ u4 b! a; {' }; M" W1 U( |; [MARKET RETURNS TO FUNDAMENTALS
; F8 c/ S% o8 {$ C; ?Grant Bishop, Economist
416-982-8063
5 G3 W2 [( q6 M# \1 ePascal Gauthier, Economist
1 S  y. m( P9 g416-944-5730
  z& d, x! Z7 P9 B4 z2 i9 R
) r$ p% ]- J7 [  ghttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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