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
9 \9 ^# S( A" A2 Nunsustainable levels of building. Our view is that house
; i! ?& s. n& m2 Q3 h7 s. Eprices exceeded the value of housing that was justified by
+ g& _; g9 p7 W4 j4 {, W; Mfundamentals by approximately 9% nationwide. This
! F% b  u; @% M6 Z5 |) roverpricing compelled a level of residential construction
' D8 B1 |9 ?0 M# g' d* F( a7 p! _that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
* T9 ^4 e4 l+ X2 `' W3 bthree years.
. w3 C% V/ S! G! GBy “overpricing” we mean that prices detached from
# G9 ]* q9 S3 ~+ K5 k7 Htheir 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
1 C8 s; ]" d3 u$ S9 Y! \; z2 g* Hto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
4 G- N/ D. C. h( H( G) Pthat this demand cannot be sustained; and “supply-driven”
  c7 m7 k) s- O; P& p0 gwhere builders accumulate excessive inventories. Although
: T" `( r. E, ?4 wthere is evidence of both types, we contend that Canada’s
0 F  n8 ~% h+ a1 t: e& t“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,
the construction of too many new homes over the boom
, E" d7 i) K4 p' Zmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
- R: L8 z# ~0 R3 R9 H2 P& Dfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
! _) t6 ~. ^2 I$ C! R, f6 ris now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
- D4 a' j8 f/ M" l+ {+ lresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
; e: I& F. N- x2 y! }! a/ @  bin the fourth quarter.
: ^- \6 H" {& n: N  |+ iTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
6 T) R' \8 z8 U0 H. g3 Vprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
3 {& \6 P' d; @* i: y  W1 R- k0 tlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
$ K/ z5 ?: I3 Fof residential construction.
To examine the degree of overbuilding, we employ a
3 E/ t# W* d0 _  ~) x# J“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
+ N8 W2 ~+ k! @units were being absorbed, homebuyers simply bought too
) ]5 W6 U) b2 qmany houses at prices that exceeded fundamentals.
. t! W2 H( U% b+ m) P, c* RRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
2 H4 d1 S) y# m6 j7 Galready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
$ _& R7 C. c8 k3 a* ~has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- e, c+ L" {% G4 `! \* J  sQuébec shows signs of strain – especially given the
, y* [; p% N% U4 ustrange accumulation of unabsorbed multiples on l’Île de
) F0 G1 `5 c7 ~: Z  H7 rMontréal – 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
, e1 b; V3 H+ ~7 y2 z3 I: kcyclical downturn, the degree of structural weakness appears
$ U; P$ |* H8 t5 q* s( `' S7 blimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
; ?3 l- O. O/ k9 X% E/ I9 e, ahigh levels of apartment-style units presently under
construction mean that record numbers of condos will
$ w5 z4 J2 Y6 z& }2 \8 S" Oreach completion during 2009. If absorption rates fall, as
. r5 |" Q, G2 r( pcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
# V( X5 K3 M7 x' J0 oresidential construction in B.C. will definitely droop, we
0 G0 ]7 a8 {4 i& A3 |1 C% vanticipate that the West Coast will continue to benefit from
4 h$ \+ @, u1 J: I6 C' M, [inter-provincial and international migration over the coming
* l# [: p4 h1 m3 P+ a5 {1 n! W0 C! Pyears, which, along with improvements in affordability,
2 E& u# V' j& R/ u2 |6 k. Uwill alleviate some of the pressure from overbuilding.
3 ~$ N5 P+ H8 ~; mOVERPRICED AND OVERBUILT: CANADIAN HOUSING
) j+ c2 f; x# z1 d% }. hMARKET RETURNS TO FUNDAMENTALS
2 ~' d. W2 c) I+ M' |" oGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730

, n5 ?) N8 P9 ^* ?+ x: Mhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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