TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
2 s3 l2 t# q1 f* E. z3 hfrom 2002 to 2008, unsustainable price increases drove
- S6 w' v+ l9 ~% W! Xunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
" w5 W3 F3 S+ \% W' K9 B  jfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
3 p9 ^  x) g2 r7 n+ v+ Ythat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three 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
$ g/ T: ^2 ^  b% I1 k6 X0 D3 oboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
7 Y  _8 @& U- a! F" J: p: u  X6 dWe 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
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
6 y) i! m( H. a* m# xthat is now being rapidly reined in.
1 h5 p8 P* c2 S3 PWhile 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
, Q& m' F2 v+ U8 l! V  I' }on markets over the next few years. Even as Canada recovers
, f2 \4 ^, U2 T/ Y& o, {from the cyclical downturn, house price growth will
2 L6 w( x$ O$ U- F% Sremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
/ @3 c, ~6 y. h9 N3 Z) ris now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
; _& W  J# R0 s, ^residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
9 I. q0 ]' n: ~: b( |9 E5 ]* Fin the fourth quarter.
4 P& L0 j2 x$ t8 h6 h$ iTo quantify the degree of overpricing and overbuilding,
% |! _/ v* |8 R# ^, D' ?1 @* u! Z: mwe first develop an empirical model, based on long-run
9 ~% l) O* p' G; g: ?( Bfundamentals of house prices and housing starts in each
2 P' J" m# A. n3 B% q2 ]9 O) Z' A" Uprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
& R% M- l: j$ e8 ^long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
8 Q7 u" o$ d" W+ nof residential construction.
& G! D6 G6 w0 eTo examine the degree of overbuilding, we employ a
: @& i9 M" F& _! _4 z1 i/ b“counter-factual,” asking what level of residential construction
% ?2 T  J+ M4 C0 N2 a5 _& a3 w! Gwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
. X$ g+ e; y3 |fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
4 w2 S: Q1 ^9 i' c5 X# Tmany houses at prices that exceeded fundamentals.
) }+ J* N2 W' u+ iRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
& y- \1 \( [. u5 P% j- h0 V' n; T; Halready witnessing surges in their unsold new homes at the
6 q2 H) C6 V; J! Lvery time that the resale market has swung into strong
4 u4 t  U, @& t/ U3 qbuyers’ territory. Homebuilding in the Atlantic provinces
  g4 Q1 P) v+ K$ s5 Z2 zhas been relatively balanced but, while not plagued by structural
' L) b7 G( e) s( Rweakness, will be singed by the downturn nonetheless.
" ?; }0 I3 Z' C) X6 L% g' @Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
  e  z' i. R/ [7 YMontréal – 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
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
# N- ]" u1 P7 |' {construction mean that record numbers of condos will
* _6 ~: i$ U6 z! e  m5 preach completion during 2009. If absorption rates fall, as
5 u% M1 o5 \5 K+ Q5 q3 tcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
. E; b' \3 F& z% I. r. J2 r' aanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
( d4 M+ D/ H6 SGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
' q' @4 R. F# h4 e5 C( n& k- Q6 {416-944-5730
" \: V) R( P# C9 U2 n( ]
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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