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
" u/ g# p6 u7 [( w2 w5 i$ s8 t" T4 bunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
8 S# C4 c& p+ ~5 T4 U: C7 Rfundamentals by approximately 9% nationwide. This
. b. [$ y4 W5 u4 d4 H' ^. c  Y3 L) |overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
5 m4 @6 y$ i- l0 c! _$ T4 i  nBy “overpricing” we mean that prices detached from
- r; O1 {6 e  Q7 l8 C# }# gtheir 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
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
+ g- n" b7 G* E8 D& w5 y% }5 v" X3 {where homebuyers buy up too many houses and
1 i  Q2 k( M+ ^7 B3 cthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
2 {4 u$ s" n9 Z6 Y) ?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
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
7 ^' [& r% w) I' y0 ?0 d7 W8 \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
( u4 R8 p4 {( h. pfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
; u5 }- N  h5 ~3 t' W. Ldampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
$ q- t3 d" K  [4 b# B' R125,000 starts over 2009 with a trough around 115,000 units
6 A9 g$ E/ w' p/ p- F0 }0 E  Yin the fourth quarter.
4 N4 F3 K3 I$ L& Y( NTo quantify the degree of overpricing and overbuilding,
  e/ H' o6 J1 E1 Bwe first develop an empirical model, based on long-run
! \/ k& Y$ |' h* l' a4 ]: t( sfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
! H# ~: n8 p% y! pvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
8 T4 C. i" H) N' f8 u) u% |regard housing prices and household formation as the drivers
: k& [5 a+ G) {) L9 z9 F( z8 C) Zof residential construction.
. c! Y, H& q7 M; HTo examine the degree of overbuilding, we employ a
- _$ w; f( j/ Z4 _“counter-factual,” asking what level of residential construction
  `7 P) U% _- P  ^. S$ zwould 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
, Z! R% b8 `3 O7 g6 I. p% bmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
% n' @0 ^$ D6 N4 O$ q/ epopulation inflows. Saskatoon, Calgary and Edmonton are
1 P  F6 u4 z/ l6 g9 R! Ealready witnessing surges in their unsold new homes at the
9 I. z% l5 Z  lvery time that the resale market has swung into strong
, _) F3 m& e. jbuyers’ territory. Homebuilding in the Atlantic provinces
$ n' d& t, d/ g1 Ahas been relatively balanced but, while not plagued by structural
* x. b, o/ R; d1 e8 D/ p5 ^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
Montréal – but recent building has been relatively balanced,
& D+ r- K  Z' U' C( rgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
$ E: Q% F4 \% F5 Acyclical downturn, the degree of structural weakness appears
! O; r; E3 R$ m0 m4 U4 T- p4 Olimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
, J9 G' S0 \' G/ q0 pconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
1 U# F4 J8 k/ x3 |cyclical factors would indicate, condo inventories could
+ Y; F" \1 l9 N9 o& R. Q) G/ ^# cspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
& Z: v# E- m/ g' Y9 J2 j9 p) p3 ^anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
& @# S9 V; r0 ~* W- \  ?years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
0 d& k( f' _3 @/ B  s: H- i' zOVERPRICED AND OVERBUILT: CANADIAN HOUSING
1 t: H% Y8 O0 d4 Z* y2 I1 XMARKET RETURNS TO FUNDAMENTALS
+ k' ~: H) g5 `# nGrant Bishop, Economist
416-982-8063
+ i- d+ y% P$ T% lPascal Gauthier, Economist
( f5 e# @; g1 x# @416-944-5730
7 L6 z4 @& ]  K+ |5 h
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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