TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
" D( Z5 y5 b+ f; @from 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
/ R! V' g6 v$ P4 F; }that exceeded its fundamental-justified level by approximately
# u1 Y) I2 _6 n2 q' i* j$ q12%, an excess that was exaggerated in the past
three years.
& k. {! s$ l. J% a" \8 PBy “overpricing” we mean that prices detached from
* o9 W. a& Q6 \5 Q- Ztheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
' ]: f0 N# I; h, ~2 v* _both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
) m3 n0 H9 n  B; |& owhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
* k9 I$ z' F) j7 C5 F1 Jwhere builders accumulate excessive inventories. Although
' U' |  C' |! K0 {! F7 S% T; M1 Gthere is evidence of both types, we contend that Canada’s
1 h- Q2 k/ H7 i3 }“overbuilding” was mainly of the first type, where
' \  Q' C/ Q6 hhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
; i: Y, x& k; fWhile most markets won’t face U.S.-style overhangs,
) [0 {# [( [2 C' P6 Zthe construction of too many new homes over the boom
; t- Y7 A: E( o5 w/ m- Ameans a deepened slump. This overbuilding will likely weigh
- G, \$ ^8 T4 A, r5 Lon markets over the next few years. Even as Canada recovers
8 h* `. S: B1 I0 b0 B& Z% l* Yfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
$ X9 x6 |; M' w* c$ Z; Ldampened, owing to this structural weakness. Construction
9 g& _5 O7 n$ [+ p( R' His now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
' w, ~* G: P" q! ?' k6 W125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
, V- v! g4 J8 ]; g/ h( W" Nwe first develop an empirical model, based on long-run
/ n% g- I1 \9 N% |, t* j( ^8 Q1 D8 mfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
* W! X, g1 A# zvalues since house prices should track incomes over the
! |: X+ q1 x4 k: rlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
. X  m6 f4 Q$ x& aof residential construction.
/ Y6 d# M3 `7 O" |$ pTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
5 w) l, s- c! iwould have occurred if housing had been priced
2 U( y- R3 U  |. ioptimally. We find that actual homebuilding exceeded this
6 s$ e- w$ C9 Q& Y9 S& w* V5 ~fundamental-justified level by about 12%. Although new
4 M; A. Y. S- m6 [3 \7 F; |2 x: hunits were being absorbed, homebuyers simply bought too
4 ^* E. C& r4 o3 @6 [, xmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
" R2 y- D# I+ e* u' M! G! }6 `population 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
$ m% w  f3 o* H! dbuyers’ territory. Homebuilding in the Atlantic provinces
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
strange accumulation of unabsorbed multiples on l’Île de
, H# k: ]8 B7 cMontréal – 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
( x; N$ H/ j% b7 h; `' M  c& Qcyclical downturn, the degree of structural weakness appears
% S. B: L; }8 y5 E0 S& b! Glimited – with the important exception of the Toronto
, @, I+ F' {0 m+ N+ ?condo market. Both in Toronto and Vancouver, historically
4 a9 U: [/ g" H7 U0 b' c  ^high levels of apartment-style units presently under
& v* ]/ C. b/ U1 X5 J/ ~& bconstruction mean that record numbers of condos will
( P: ^' s9 {7 ~: [reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
1 d& Z$ H. J5 m5 ?( Xresidential 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
years, which, along with improvements in affordability,
  y  ~4 P  W1 N; ^$ C" M7 {# [will alleviate some of the pressure from overbuilding.
% x  u4 b( [2 J  g. G4 |  D4 iOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
6 J; m, r5 ]0 k) R3 n+ Y7 u; iGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
. r5 z+ c6 T, A. U. Q, l416-944-5730
1 y2 x% |- X  G/ B% V, R8 _
# ]( ~: v/ j* ]http://www.td.com/economics/special/gb0409_housing_exec.pdf

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