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
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
1 x% c4 W# h' t8 Wfundamentals by approximately 9% nationwide. This
" }* `; a3 h0 X5 K5 K% _overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
3 x6 w2 e0 i# h8 V8 H) Q! n, |  b+ M12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
9 B- {- L9 [8 D" itheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
' j# v' t5 i6 q4 `% Fboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
# q# [4 i4 Z& ?) mwhere homebuyers buy up too many houses and
  e8 w- g7 a8 Q9 m* |1 Fthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
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.
; z" ~! N! @( KWhile most markets won’t face U.S.-style overhangs,
! K& m) Y1 C0 ?" r  w- Lthe 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
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
+ g5 p/ x( O0 C7 H- r& adampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
9 L0 V) T+ p% g' T7 sto 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
: U5 @' Y0 k  l9 jin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
$ s5 D$ ?2 ?0 P4 Wwe 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
0 o0 z# }; k; B: U" y* ]6 J! nvalues since house prices should track incomes over the
, `; \( u8 p2 K- e) m) Dlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
% [) N% P# z5 r4 b2 L: E( |8 M) L- R/ jof residential construction.
To examine the degree of overbuilding, we employ a
+ J& k% K+ x+ f) b! S8 U“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
  X$ e& Q: ^7 M- Ifundamental-justified level by about 12%. Although new
* a( c1 i. ]) qunits were being absorbed, homebuyers simply bought too
9 u5 u. j; g( Z' V) \! tmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
4 f2 D" }& p/ [. ^: l2 a* ^$ d1 nwhere housing demand will further contract under waning
( C" l. e+ p# x# y2 _population inflows. Saskatoon, Calgary and Edmonton are
" W% h1 v  I* e) oalready witnessing surges in their unsold new homes at the
+ n8 ?' D* h6 o! r: H" rvery time that the resale market has swung into strong
& v( h0 @" x3 K) Sbuyers’ territory. Homebuilding in the Atlantic provinces
4 [5 x: ~5 v) L& V1 d8 t6 T5 Uhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
" Y6 V7 n7 L4 n% H" l0 Q2 @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,
given the province’s history of under-building and low ownership
* X# S8 E2 l0 I! \rates. While Ontario homebuilding will reel from a
* s) z3 K4 g  f5 K" E& dcyclical downturn, the degree of structural weakness appears
& e. R( P' v, i/ glimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
+ I, w$ L3 q4 R2 ^# Vhigh levels of apartment-style units presently under
  B  Q* l: z( C! h' Aconstruction mean that record numbers of condos will
* f7 W. _' M' L" T( f7 yreach completion during 2009. If absorption rates fall, as
" e% ^  v% T9 j7 ycyclical factors would indicate, condo inventories could
- ^+ i& [7 x0 v( \3 P3 t3 @! P- ospike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
0 K) O/ W; g3 X8 b/ Ganticipate that the West Coast will continue to benefit from
2 J* I% Q) B0 I& l9 Y2 [inter-provincial and international migration over the coming
% |. o) L' j+ C5 e+ _  `years, which, along with improvements in affordability,
" z- J" G% i2 \* ~" }will alleviate some of the pressure from overbuilding.
9 ~& H, r. B8 dOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
: g% F/ H6 {  [  A# x5 a' n416-982-8063
Pascal Gauthier, Economist
416-944-5730
, c7 Z5 O7 u' Q& h
- `& Q1 C* ~8 \* a8 shttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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