TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
( _- y3 R. f! u& H7 qfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
1 e/ g1 W1 n8 c3 ^) ~. ~, Jprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
$ o5 m/ h1 {- Xthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
0 g! U5 D2 L" s2 @3 q; L# CBy “overpricing” we mean that prices detached from
: j, a# |, }  a- ^their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
/ F" p, Y9 Y. N" lboth a cyclical downturn and a return of house prices
1 K+ G  F5 v; K5 f3 gto fundamentally justified levels.
' |8 f5 D  _$ {8 e% B: k: L( j8 U2 LWe consider “overbuilding” of two forms: “demanddriven”
& G% G4 s, V# R( s& xwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
- x. h: h9 ~" y% Y2 d1 Fthere 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
6 e6 A. C/ A( V- ?( tthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
2 j. T( Q& K& g+ U3 d9 t6 Lthe construction of too many new homes over the boom
3 {+ ^1 I- f6 s+ X1 c' gmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
% O9 U, m, d8 V  i" Wfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
2 j9 ~$ B. `) C& Q& odampened, 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
; @" d" T7 ?" M. H2 Y8 G125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
8 l4 n0 `% M5 g( |8 H( E2 tTo 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
; ?2 @$ E1 j: r) F: Qprovince. Affordability is the key concept behind home
$ j6 _/ a8 R2 @6 a* Gvalues since house prices should track incomes over the
) J% ?( m6 f( }: J. V4 O. Rlong-run. Since homebuilders build to meet demand, we
* G2 q4 k+ H. Z6 Q0 ^. o$ o+ F7 {regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
8 H) T& s8 p! z$ rwould have occurred if housing had been priced
4 }9 a  [" c6 m" |" o6 x, I% {optimally. We find that actual homebuilding exceeded this
. w0 @  M3 ?% A8 E/ c9 Vfundamental-justified level by about 12%. Although new
$ |$ P* f5 A( L! wunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
2 N+ U+ |# G. b* K( w% D& Yalready witnessing surges in their unsold new homes at the
$ [0 c- I. D) z# H, K& V3 ?1 P  lvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
3 d  z8 D4 q2 M( nhas been relatively balanced but, while not plagued by structural
: Y% \' V% s" U' ]  Q; J# w. j" R% a+ sweakness, will be singed by the downturn nonetheless.
8 q2 n( _0 _: R/ e5 Q3 K& ?Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
6 y: N6 T; q% M: bMontréal – but recent building has been relatively balanced,
& I/ C! P0 ?; j2 ugiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
' G; ?1 c' |5 ~4 Mcondo market. Both in Toronto and Vancouver, historically
; p( d! d2 V. q7 F& xhigh levels of apartment-style units presently under
* ^0 ~( v1 J# U+ H; y& hconstruction mean that record numbers of condos will
( e* Y9 n- L* `reach completion during 2009. If absorption rates fall, as
4 |! |. R5 p" N0 [/ W- u! [; gcyclical factors would indicate, condo inventories could
7 Q* J0 i: K$ D. @# p; lspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
5 \. b/ X" ~1 _4 t: D( v2 Hanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
: t0 Q& F) _$ F: D2 \years, which, along with improvements in affordability,
# K1 |& w, j% `1 J" M3 G. ]will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
- z- G7 B6 y' I, F0 mMARKET RETURNS TO FUNDAMENTALS
* A* @. T4 ~: r9 \: ?' @Grant Bishop, Economist
8 o. E8 J& x! r8 l1 e+ I416-982-8063
; a* u2 T* k9 I, A1 u, gPascal Gauthier, Economist
0 ~1 y2 U' X! x7 f$ D416-944-5730
2 s8 g2 s& f5 s% }* T
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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