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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
% J) m# W) a# {' _+ h$ _from 2002 to 2008, unsustainable price increases drove
" B& I5 l+ w6 @unsustainable levels of building. Our view is that house
6 P( W+ P" g; q# B# Wprices exceeded the value of housing that was justified by( N7 Y# ^+ _6 H% z2 E& y
fundamentals by approximately 9% nationwide. This$ J- I+ @" d. N% a
overpricing compelled a level of residential construction
. I$ w$ G4 q& `/ u; uthat exceeded its fundamental-justified level by approximately# w4 Y: a% q5 A- t/ _5 j0 ^9 ], M
12%, an excess that was exaggerated in the past- x( z+ [0 H8 w( [5 r
three years.
+ k+ L4 _) z+ ?0 \By “overpricing” we mean that prices detached from) y! d% E! C9 k/ n" ^
their fundamentals, as witnessed by a steep erosion of
. D: m" x4 f( p1 S7 N% p. uaffordability. The current unwinding of house prices reflects' J( ?1 D+ O* M; [$ Z& \9 w7 D
both a cyclical downturn and a return of house prices6 {" t9 m6 i) R7 V+ g$ F) w1 ]
to fundamentally justified levels.
3 p; m5 d, ]3 G! @- DWe consider “overbuilding” of two forms: “demanddriven”8 s; L3 m2 v5 s
where homebuyers buy up too many houses and
* V# U+ k( Y8 v$ C2 @that this demand cannot be sustained; and “supply-driven”, N0 }0 k! ]7 b8 r4 N' o- J% ~3 t
where builders accumulate excessive inventories. Although
% ^3 o1 x9 S+ t$ q% E$ R, Y! nthere is evidence of both types, we contend that Canada’s
! ^6 b, h3 ]" A0 j1 p. _“overbuilding” was mainly of the first type, where2 {  T# e% ^; H5 ^- J
homebuyers pushed homebuilding to an unsustainable pitch. X9 V+ @7 ~6 J( {! M
that is now being rapidly reined in.7 j: g" n1 A% e% b  f) F
While most markets won’t face U.S.-style overhangs,
& Z1 I+ b+ Y& `( }% {$ {  Wthe construction of too many new homes over the boom6 ~+ A( t) ]" m5 K$ i
means a deepened slump. This overbuilding will likely weigh
0 }5 q( U, |9 k  |# h( {2 I0 {2 _on markets over the next few years. Even as Canada recovers
% ^5 A2 W8 y6 W# o# w) u& mfrom the cyclical downturn, house price growth will) K9 P/ R& A, J; u9 q* C8 ?1 w2 b
remain choppy and new residential construction will be
7 }: d% q9 \2 {  F) n6 l2 p( ^dampened, owing to this structural weakness. Construction
0 _1 d& q7 N5 ~: Q8 U5 K  |( Jis now undershooting fundamentals and we expect this
  J  v1 V- J7 w" i; d5 ?to persist over 2009 to 2011. We anticipate that nationwide3 w5 g" I9 t; d; b- P
residential construction will fall further to around7 b0 x% a/ `) X' q( J5 E* {
125,000 starts over 2009 with a trough around 115,000 units" D) s1 m+ ]; d" r1 |: \1 b* }  V
in the fourth quarter.
, {# p) z/ o9 B' f! vTo quantify the degree of overpricing and overbuilding,3 ^! V, S( s% v" S
we first develop an empirical model, based on long-run3 o6 g! s" L1 [
fundamentals of house prices and housing starts in each
. ^! s: x! }" J6 nprovince. Affordability is the key concept behind home
$ l3 K- F1 g1 o: y! u+ }- \values since house prices should track incomes over the6 s! Z9 j) R4 W* s* u: [* X% s
long-run. Since homebuilders build to meet demand, we
  V% d7 n' V6 V# kregard housing prices and household formation as the drivers9 s4 p& B; C  Z2 s) Y
of residential construction.  Y% G+ x' s2 @, @9 i- P
To examine the degree of overbuilding, we employ a
/ g; e- I) z! ?+ _“counter-factual,” asking what level of residential construction
/ W$ p/ i$ t! c9 z' }, }% twould have occurred if housing had been priced- e/ H& k7 Y4 u0 I" y
optimally. We find that actual homebuilding exceeded this
# N2 m/ k% y+ m; T: m2 D9 vfundamental-justified level by about 12%. Although new, K1 m4 z8 B2 v9 ]3 @% v' w5 A
units were being absorbed, homebuyers simply bought too5 O1 W  L8 @& c& [' t
many houses at prices that exceeded fundamentals.  H2 D4 V! \9 {6 m  Z! h8 \( x9 P$ a
Regionally, we see the greatest strains on the Prairies,+ |* f3 @$ }$ i/ o, n
where housing demand will further contract under waning
3 g, U. [6 v1 Q8 l0 |( F' dpopulation inflows. Saskatoon, Calgary and Edmonton are
" w2 Z" K7 V* e5 Galready witnessing surges in their unsold new homes at the
, p. Z3 {) O: P1 W0 m- xvery time that the resale market has swung into strong
, X+ n) o0 e+ {9 Ybuyers’ territory. Homebuilding in the Atlantic provinces
4 H5 v$ I; V7 _6 M: Ghas been relatively balanced but, while not plagued by structural* M9 j! ?' ?# r, r7 u$ u, ?
weakness, will be singed by the downturn nonetheless.- d$ b$ k8 e  o* q4 M" l( E# F
Québec shows signs of strain – especially given the8 z9 Z- a% m6 }6 Q
strange accumulation of unabsorbed multiples on l’Île de+ B. M. }! t4 J6 F2 S* X
Montréal – but recent building has been relatively balanced,
2 P; d& {0 e. G4 E' ogiven the province’s history of under-building and low ownership# d8 A) K5 T5 k! {  C% }
rates. While Ontario homebuilding will reel from a8 O; h( r# @. \. e) T0 A
cyclical downturn, the degree of structural weakness appears
2 a; W- L' k5 y/ }limited – with the important exception of the Toronto$ l: J$ x! k* ^
condo market. Both in Toronto and Vancouver, historically0 e& _/ d3 ?+ d: K/ \
high levels of apartment-style units presently under0 E, \! i1 A! l" K; j
construction mean that record numbers of condos will
, r! `" X, M7 q3 z) l9 r2 Wreach completion during 2009. If absorption rates fall, as
2 K5 j  P6 ]9 \( J6 m" B; ^cyclical factors would indicate, condo inventories could
" C7 c! G7 j: C1 Mspike severely – particularly in Vancouver. However, while
/ f7 x3 q0 j5 T- T/ b+ wresidential construction in B.C. will definitely droop, we& U$ H& k  X  @5 X9 P6 g0 j5 e
anticipate that the West Coast will continue to benefit from
8 X/ n5 w% M7 Ainter-provincial and international migration over the coming; @" \, O; _& x+ f# p0 ~, U
years, which, along with improvements in affordability,6 ^+ I* p( H" l( j1 \
will alleviate some of the pressure from overbuilding.
6 U- ~7 N& i1 T4 h( SOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! B9 Z3 ]+ V$ N1 u9 kMARKET RETURNS TO FUNDAMENTALS
% |, i0 W' w" y. P8 I* s" GGrant Bishop, Economist& F$ }6 S8 K# S7 Q( a: v) f9 F
416-982-8063
* ?& W7 d: v3 ^" o5 g) nPascal Gauthier, Economist
' q# g+ C$ P4 ?: Y1 L% ^0 X, q416-944-5730
2 Q5 M, h- J7 H9 j9 q
4 B5 \: ~' U& m) k  _http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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