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
fundamentals by approximately 9% nationwide. This
# J9 K  a# d) H8 O. x; s* ^% koverpricing compelled a level of residential construction
+ C3 v# L* ^1 a( f' L6 Y2 v8 i2 [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
2 W, {% N3 E3 H# Ntheir fundamentals, as witnessed by a steep erosion of
1 f1 W. N. V2 E1 Q/ O9 Iaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
7 M; ]: z- f* N* e) Y: \' m3 n0 Lwhere homebuyers buy up too many houses and
% j+ N2 O- r1 U: _  w. sthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
8 B7 W+ S: V( ^" M* pthere is evidence of both types, we contend that Canada’s
, T7 C5 U3 a7 e" _0 ?* l# c“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
6 s: ?. O, Q6 x1 `' o7 m3 Nthat is now being rapidly reined in.
" }# ~2 S$ }6 Y1 ?3 o2 mWhile most markets won’t face U.S.-style overhangs,
  C4 ^1 I  q. |. b% s! rthe construction of too many new homes over the boom
% s5 ]7 l# P4 N5 ]6 I3 v0 Pmeans a deepened slump. This overbuilding will likely weigh
7 O/ Z- J+ u: @! w% M2 jon 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
7 |6 P4 Z  s  ~dampened, owing to this structural weakness. Construction
" ]5 p7 e' `1 C2 ~& }& {5 x, \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
125,000 starts over 2009 with a trough around 115,000 units
- `+ A' U% x  \6 w3 h$ D. Xin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
! W$ a' O% U! @) Nwe 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
values since house prices should track incomes over the
8 E3 t. X3 p4 P! J) clong-run. Since homebuilders build to meet demand, we
% S- V3 f7 C: q# Mregard housing prices and household formation as the drivers
% z/ s6 G9 Q2 d) M$ ~9 gof residential construction.
2 H# d3 J0 X9 ^% p8 z# d( S" \8 L4 FTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
; h1 {% o: d% K4 woptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
# {2 k% D" m3 \& E! P* S  p+ m9 kmany houses at prices that exceeded fundamentals.
4 A* ~. D, O+ O8 p* [* u4 u# ^; I  ?4 `Regionally, we see the greatest strains on the Prairies,
0 F3 Q+ R' m& H' X4 f9 `where housing demand will further contract under waning
1 W) X! w* S9 S# upopulation inflows. Saskatoon, Calgary and Edmonton are
3 H+ |: F8 [# s* p4 _already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
8 Y* m" {0 q7 l1 m. B9 W, ?5 T" vhas been relatively balanced but, while not plagued by structural
. N7 t$ ~" g) Pweakness, will be singed by the downturn nonetheless.
. h6 ?" K, T! P% d# q  _: E' ?& ZQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
6 y4 ~0 k4 ~( h% l' Z, s" v. C% L- sgiven the province’s history of under-building and low ownership
9 F; `, W& t, _7 ~; R( ~7 vrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
$ Y+ W% d. C% w' e0 x# }, }limited – with the important exception of the Toronto
" L) A5 a! u6 U/ Vcondo market. Both in Toronto and Vancouver, historically
: S+ Q+ d+ a3 B0 C" ghigh levels of apartment-style units presently under
construction mean that record numbers of condos will
2 T, Y9 z+ x, M% I2 z8 M; n# i' Jreach completion during 2009. If absorption rates fall, as
. n" {5 l2 n# y' G5 @2 m8 Acyclical factors would indicate, condo inventories could
4 P( @+ s8 m/ S* N  [spike severely – particularly in Vancouver. However, while
; B, I* Q* p$ q4 wresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
; Z, K$ B2 g% B9 j% K. ayears, which, along with improvements in affordability,
& U1 U8 n. r, Owill alleviate some of the pressure from overbuilding.
0 m2 c+ b+ f8 WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
; N- \& j' |1 F- BMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
+ M/ w( X% F" z7 m6 A416-982-8063
Pascal Gauthier, Economist
416-944-5730
, s: ~4 x. c- |
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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