TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
# v5 E3 c* f1 S! Qfrom 2002 to 2008, unsustainable price increases drove
# W" ]/ ]/ v! p# bunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
9 J  p. d$ d- m; ~/ @' E% U: C" A+ a. J' `. ~overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
: m8 P  r8 t+ v, u+ n3 j12%, an excess that was exaggerated in the past
8 z8 K$ ]+ S! T( othree years.
. ~. [" r5 x" {$ Y9 c( ^, D, l! x7 GBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
' L2 p# N6 s2 e- ?* @! Haffordability. The current unwinding of house prices reflects
6 `  I8 F, U' mboth a cyclical downturn and a return of house prices
: g2 P# ^/ U" r! V6 _to fundamentally justified levels.
0 N2 K. _5 }) d, G) J$ V: r. P7 t- gWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
, D9 b2 r" C4 M# f5 E7 ?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.
While most markets won’t face U.S.-style overhangs,
! v" A2 I# N3 T% f2 r* Mthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
1 {5 p; Z1 y8 G; b0 Son markets over the next few years. Even as Canada recovers
  F+ d, T) ]5 ^% n, u2 z; Xfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
* B( Y( y% q$ T1 I/ sto persist over 2009 to 2011. We anticipate that nationwide
( P- e% O5 t* I# [) G+ Zresidential construction will fall further to around
) ^9 O3 E0 }0 P) l2 A125,000 starts over 2009 with a trough around 115,000 units
+ S  b5 |" {' qin the fourth quarter.
  ]% D# L, \6 Y4 T- nTo quantify the degree of overpricing and overbuilding,
) ?: ^8 B. {6 Iwe first develop an empirical model, based on long-run
+ A$ l5 I, V  @, W9 h" |0 x3 Tfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
& l' j  m6 N% e- Xregard housing prices and household formation as the drivers
$ e1 d5 Z" T6 D3 f) s5 i+ W( h9 Yof residential construction.
To examine the degree of overbuilding, we employ a
! o8 D. q' G1 L0 D3 f( ^6 f“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
1 \; f8 p1 x- k' e# H3 M2 tfundamental-justified level by about 12%. Although new
, h7 {) H8 q, Z8 @2 m. Y( e3 X8 R) sunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
: y" ^, ]* P4 Z: k5 t  S; Pwhere housing demand will further contract under waning
) S) B' L* k7 {7 _6 V1 s& f/ Q/ ^population inflows. Saskatoon, Calgary and Edmonton are
3 M& Z% I. k! j* talready witnessing surges in their unsold new homes at the
  Y5 g7 v2 I. {6 Svery time that the resale market has swung into strong
, r! f3 [: R3 A  Rbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
7 b9 W1 V; k$ ^; vMontréal – but recent building has been relatively balanced,
( m" e+ x- p: |" h5 k$ lgiven the province’s history of under-building and low ownership
, B8 S& ~# {# |# U* M/ X% `rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
9 z. m) Y- ?' J2 I$ n. ~3 plimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
# O) T7 H+ G& M4 zconstruction mean that record numbers of condos will
; N9 O  A- E) m( P6 W, ureach completion during 2009. If absorption rates fall, as
9 N& w" C+ A' u2 d5 \cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
5 m7 {% q' O0 p  q* ranticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
# c! K) W8 e- o' {! Eyears, which, along with improvements in affordability,
4 E: O# x! e2 M! owill alleviate some of the pressure from overbuilding.
8 U4 `3 V1 u% c, Z) A2 ~OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
  f- y6 u* m* F7 F0 c416-944-5730
2 F  v% a; r, C  D# E
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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