TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- d" f# c# Y7 {$ Nfrom 2002 to 2008, unsustainable price increases drove
unsustainable 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
' E$ b/ y! j$ ^' V- i1 O, qthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
8 L5 r; D, s9 _- d. ^# Kthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
6 z/ s( j+ i1 ]: G, D5 w5 |0 S- Taffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
; v$ h3 [9 F2 |% }$ O8 ito fundamentally justified levels.
4 a* l* I. n5 @) S4 h# W6 i2 _- e2 yWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
# W5 O  D' g" xthat this demand cannot be sustained; and “supply-driven”
- J4 j) g. e; O$ W3 W3 iwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
- R* v$ E/ b9 {9 |# e( y“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
) L2 T- |5 I4 x0 w1 V/ @( n/ p5 mthat 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
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
) {) @1 I( g: B9 B. U% xis now undershooting fundamentals and we expect this
# ~- e, j4 M& X# H4 y: Oto 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,
7 }* H$ e: f9 |/ D6 u4 Owe first develop an empirical model, based on long-run
) B+ x8 D3 n% D5 [8 Zfundamentals of house prices and housing starts in each
% S. n" N! _) w' bprovince. 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.
- Q* t( @$ w) q; h4 Q- K$ DTo examine the degree of overbuilding, we employ a
; d8 D- @- F( ~1 K+ J) z“counter-factual,” asking what level of residential construction
& g& E5 Q, t/ F) nwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
: U6 G! \6 |4 S1 j6 x5 Ifundamental-justified level by about 12%. Although new
' c8 f, l  k: {* \5 C0 r9 i- N, }units were being absorbed, homebuyers simply bought too
* G7 k, t7 L! o7 Pmany houses at prices that exceeded fundamentals.
: A. H! W' }+ URegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
) ?/ ]1 h9 X2 J7 k. ?3 G" Apopulation 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
buyers’ territory. Homebuilding in the Atlantic provinces
. b+ [4 f$ d" T9 }5 \has been relatively balanced but, while not plagued by structural
5 X2 U$ X: d0 C" G6 jweakness, will be singed by the downturn nonetheless.
) i8 x2 `3 T& f/ M$ yQuébec shows signs of strain – especially given the
2 z- k0 ~! f* n  X7 J6 cstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
  E7 w) r/ d4 \8 n7 fgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
" B, V' K: u1 @. ~cyclical downturn, the degree of structural weakness appears
' T- V/ F- P  Q( j6 s+ o. Llimited – with the important exception of the Toronto
& x3 N* F8 n& j% r: k. U/ H% acondo market. Both in Toronto and Vancouver, historically
- f- D: |+ S! a5 s1 M3 \/ fhigh levels of apartment-style units presently under
! Q0 N0 B( b! [1 Gconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
! Q2 J  I/ F: w% Z# |cyclical factors would indicate, condo inventories could
" y" W+ x5 e5 r+ ?: y9 P* ?5 Uspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
% I, T* T0 L; W! O. U9 w  z' f8 ~anticipate that the West Coast will continue to benefit from
* [' ^1 n2 h& A8 Zinter-provincial and international migration over the coming
/ u) n( \# c* e% q8 s7 [years, which, along with improvements in affordability,
- |! Y8 J2 }5 f/ Y# [7 g. Awill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
9 Y: X% p$ \9 ?3 ^7 QMARKET RETURNS TO FUNDAMENTALS
7 T9 \0 q" ?& W) o" c- yGrant Bishop, Economist
: }4 o" [9 o5 i3 ^416-982-8063
Pascal Gauthier, Economist
$ p2 T* G0 ^9 M: Z  R2 a- t416-944-5730
! i+ `, H7 l" ]9 \- b) d$ U
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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