TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
+ z. g/ i! S9 b1 cfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
& W& G" }, I; A/ dprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
' }& ^: k1 G# b  Z) d8 H, [/ Y1 goverpricing compelled a level of residential construction
8 `; N  F" N- |2 m% Ythat exceeded its fundamental-justified level by approximately
3 ^' g8 ~5 s$ w& W12%, an excess that was exaggerated in the past
- R; I2 o3 x" _4 {; d: ethree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
$ o! l/ }3 Q, \affordability. The current unwinding of house prices reflects
6 M9 V2 g& T8 }9 g6 g+ w8 O1 Gboth a cyclical downturn and a return of house prices
to 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”
3 v$ y" w- P, p/ J# ?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
5 Z  R2 x' h/ q( _! Jthat is now being rapidly reined in.
# k) u' o, q& oWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
' P7 I) @4 r3 ^) b/ V& umeans a deepened slump. This overbuilding will likely weigh
) U7 V! F4 E/ p8 i, Hon markets over the next few years. Even as Canada recovers
! |1 m& y4 \( _% S! m$ f, g  C, O2 Ifrom 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
4 ]8 `) ]4 K  Y: [+ Oto persist over 2009 to 2011. We anticipate that nationwide
$ i  v3 B/ I7 K7 nresidential 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,
5 j+ R: }! m: W9 x7 @$ f# J% ywe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
! u& w3 a. @. |) D9 U" R8 [values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
( ~7 `4 _% H" c4 zregard housing prices and household formation as the drivers
1 B  h2 d* P) q2 f8 ^$ tof residential construction.
' h" j) z# j$ M9 s2 y. V! V0 zTo examine the degree of overbuilding, we employ a
- {2 d( C! r' W! i“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
units were being absorbed, homebuyers simply bought too
5 y. m- e) S+ o! s1 ^" Imany houses at prices that exceeded fundamentals.
2 p3 J# A+ u0 C9 ?% |& Y, @Regionally, we see the greatest strains on the Prairies,
& v1 Y5 X3 P' v( R7 ]; n' @2 {$ |4 Pwhere housing demand will further contract under waning
" W8 n1 Z4 }* f4 D& t! {population inflows. Saskatoon, Calgary and Edmonton are
* K* i' I6 V9 Ualready witnessing surges in their unsold new homes at the
% p. Y' f' Z  h- a! V, B! Dvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
/ u* D. e; w  ?% }5 HQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
3 h7 J$ u5 A) {: w( V. l. f4 qgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
. m& u' i8 b) Y5 F8 Icyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
' m8 B2 ]" X5 a/ C  l  ?high levels of apartment-style units presently under
1 C  V& l0 _9 ^+ P2 {construction mean that record numbers of condos will
" M) B3 X; `+ Xreach completion during 2009. If absorption rates fall, as
+ ?; q, @* g, x7 ncyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
  o3 ]0 ~" w+ O7 zresidential construction in B.C. will definitely droop, we
0 [( E8 m3 D* F" W( v8 santicipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
8 Y2 t/ P/ ?6 _years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
9 F/ L% E2 A2 Z# LGrant Bishop, Economist
! U. ^4 h2 C; ^6 I416-982-8063
: T1 [3 i4 i1 t8 f  T7 I1 [Pascal Gauthier, Economist
# m) G. s$ ^" F- c3 N416-944-5730

$ e: \% [8 [3 @3 o; c* E; f# n& `3 nhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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