TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
; g% U3 g- y, gunsustainable levels of building. Our view is that house
7 e, ]6 E7 e1 a3 Y" z5 {2 _prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
0 D" x5 Z) L0 s- `overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
! v/ }( \8 s  E12%, 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
both a cyclical downturn and a return of house prices
' Z# ?: b& r3 Eto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
: n- A2 \' T) G$ I3 c' g' F/ y* Ythat this demand cannot be sustained; and “supply-driven”
+ M4 k% ^( [  J8 u  S9 Q5 D8 F" jwhere builders accumulate excessive inventories. Although
3 p) Q6 B. [  s4 Ethere is evidence of both types, we contend that Canada’s
6 _" C8 ~( t, l- m: W/ p* W“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
3 p2 i' g/ D, X9 w& e5 m/ ?! Mthe construction of too many new homes over the boom
  l9 {. W; B' B+ ~means a deepened slump. This overbuilding will likely weigh
0 e" M0 C7 T% Z1 G6 r7 lon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
9 z# {+ Y# t" i8 F) }! dremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
$ [- c7 c; A- k$ ^+ Lis now undershooting fundamentals and we expect this
to 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.
; J; k) p  `/ P, J! W9 bTo quantify the degree of overpricing and overbuilding,
! d) `! G: d6 e( D6 a+ Bwe 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
values since house prices should track incomes over the
+ _% V0 ?4 S" [3 z& ylong-run. Since homebuilders build to meet demand, we
: i' u7 \+ o9 Dregard housing prices and household formation as the drivers
of residential construction.
$ b0 N' |/ k, W6 r2 jTo examine the degree of overbuilding, we employ a
“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
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
5 J5 A" o; `: Dwhere housing demand will further contract under waning
3 U/ j, O! I# @, ^9 hpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
( |* f2 q6 D) @7 v- gvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
) a# r7 G0 ]) g- d: X. u! G& }$ B: Zhas been relatively balanced but, while not plagued by structural
+ c+ g9 J3 C' i4 s% Iweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
- A  W: q9 Q; S' C; g7 astrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
  D. ?- o1 K0 D7 Trates. While Ontario homebuilding will reel from a
# w+ V8 ^& g$ y, @+ ocyclical downturn, the degree of structural weakness appears
2 g. [, K( L. x! Q0 P& Plimited – with the important exception of the Toronto
4 d0 I8 I; o3 Pcondo market. Both in Toronto and Vancouver, historically
( b: I2 i1 f1 z3 B' B3 r* @high levels of apartment-style units presently under
5 {2 R# T+ R8 e, d4 \! X* j/ T2 L4 Vconstruction mean that record numbers of condos will
! @7 U, p! A8 j  ]  d, \reach completion during 2009. If absorption rates fall, as
0 N# i1 M; _& D3 icyclical factors would indicate, condo inventories could
% I4 R) l% L  i$ xspike severely – particularly in Vancouver. However, while
! P! B: A* p: g3 R0 ]* rresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
; N% P6 t% x4 ^- w% P0 ]inter-provincial and international migration over the coming
3 G; K6 c$ V- o& V. @3 |years, which, along with improvements in affordability,
1 j0 E9 o" A5 b- L8 Z, K- zwill alleviate some of the pressure from overbuilding.
3 A- d  I- ]3 d% A" YOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
- N: c) l- g, b# y* C3 P9 W" ]Grant Bishop, Economist
416-982-8063
7 q. [3 x- l' y6 c0 mPascal Gauthier, Economist
% Y& r9 F% g* L9 V0 V416-944-5730
; E; o) y9 ]% |6 h8 Z. ?* ^
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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