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
% z7 Y! y9 I6 v; }) _% [* m% Nfundamentals by approximately 9% nationwide. This
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.
By “overpricing” we mean that prices detached from
1 z( T' E2 q. R0 t. X9 d; x( H! vtheir 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
5 u4 c! X4 \# K1 A# @8 lto fundamentally justified levels.
( s3 X; G+ X& |6 xWe consider “overbuilding” of two forms: “demanddriven”
1 F  e2 f" |( `where homebuyers buy up too many houses and
5 f+ k( f% O# A$ ?that 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
2 V; e; p* K! o/ g* s- a“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
+ B  V- X" f" o3 y) @& j7 ?) s  ]* kthat 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
means a deepened slump. This overbuilding will likely weigh
: I2 {* P) [1 B, F* won markets over the next few years. Even as Canada recovers
3 p) J  ?& Y+ Yfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
# T) \# A$ L7 f6 z7 X2 v6 Ndampened, owing to this structural weakness. Construction
0 b% p& f( g& [- _is now undershooting fundamentals and we expect this
# ^! F3 p! x* e* W8 lto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& H/ l# J) A' V+ u125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
  f1 ^2 W4 K1 P! a* T% Awe first develop an empirical model, based on long-run
5 Z5 I+ [5 m$ w9 E! {' ~1 @: s& Ufundamentals of house prices and housing starts in each
4 i. g. n3 V0 i9 w& nprovince. Affordability is the key concept behind home
! y5 Q; m, D$ ovalues since house prices should track incomes over the
' @, l8 A5 V; K1 U& h* M- Hlong-run. Since homebuilders build to meet demand, we
3 x/ K" V4 q6 L2 _$ U, Qregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
+ R0 \. @7 _4 e$ H3 G( V' y$ k“counter-factual,” asking what level of residential construction
1 R* J* L' X; @would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
! Y' u$ T0 M0 N, o5 W1 ^- a' C9 Z9 }units 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
4 X1 w: h- B" v- j* r" i$ b: C( Mpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
3 _1 \$ {6 [" [5 fvery time that the resale market has swung into strong
! u8 Q+ z% j8 D8 Q4 Q5 f! Qbuyers’ territory. Homebuilding in the Atlantic provinces
) J# v5 G! _: Z4 ^has been relatively balanced but, while not plagued by structural
2 H' Z; p6 x/ ?6 a8 \weakness, will be singed by the downturn nonetheless.
) F6 H0 n: i1 oQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
& N7 e5 t" a8 q0 G8 C. E7 w  `given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
/ L  n$ B0 Y6 b! e; F- ocyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
9 H  W1 u+ \8 X% s* k% f2 l3 }% jconstruction mean that record numbers of condos will
# P+ Y8 f. a1 qreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
5 H1 V* E2 P0 J& {3 oanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
" c8 c% d5 A/ x" J* G' Uyears, which, along with improvements in affordability,
' M0 m8 D3 l' Q; z4 M% _will alleviate some of the pressure from overbuilding.
8 M. I" N2 E; {6 z7 z) W0 COVERPRICED AND OVERBUILT: CANADIAN HOUSING
6 T2 w% m1 ?9 T; Z- ~7 Y5 VMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
* W% I% u# A5 z/ z  s+ ]4 f416-944-5730

" o' {: P2 b$ a0 v& d/ [% \) @http://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙