TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
9 N0 ^0 l. t: ^  U) z! R0 sfrom 2002 to 2008, unsustainable price increases drove
/ G1 E' L3 _$ |) {8 ^' ~) `unsustainable levels of building. Our view is that house
1 r2 R' _5 |/ @2 y5 d1 `9 _prices exceeded the value of housing that was justified by
" Y6 H2 X& ]; ]fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
6 n2 ~* \: A0 C" _8 p12%, an excess that was exaggerated in the past
& D& c7 m4 k1 U1 b2 Bthree years.
By “overpricing” we mean that prices detached from
$ i& V. }2 B0 L7 Xtheir fundamentals, as witnessed by a steep erosion of
. |8 a2 O4 F3 J: z9 Z) {$ ^, X' a7 ~affordability. The current unwinding of house prices reflects
. h4 J. d8 v) M' e# Sboth a cyclical downturn and a return of house prices
0 m2 K6 f( i% f, |5 x) Y+ D( X% sto fundamentally justified levels.
- l* b9 |6 p/ L  B/ ^$ pWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
$ M0 d! F3 r" T& Y. pthat 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
0 a: R0 {7 L" B# a, @6 J' _5 _) I6 E“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
$ D" G/ M; e4 n& y2 n/ mWhile 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
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
7 i; h2 F4 U2 m* D- X! ~remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
9 l0 D' B4 f3 ?' b' eto persist over 2009 to 2011. We anticipate that nationwide
, p" K! P4 y& |. t' g. U2 D+ k4 {! Mresidential construction will fall further to around
3 e% O9 L% n; t% Z) ]4 x125,000 starts over 2009 with a trough around 115,000 units
3 ~+ F) g: l& B4 L) J, j  U( E% bin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
  R8 C/ o, Q* ^1 pwe first develop an empirical model, based on long-run
' d5 M; N/ e6 i) t8 i' p% Cfundamentals of house prices and housing starts in each
& b8 ]' z+ ?" h8 ~( m* J8 Jprovince. Affordability is the key concept behind home
( o* |/ _3 f1 l3 svalues since house prices should track incomes over the
# E( f' O' r  c: A" r7 G( n. Along-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
2 L) \, u, ^3 @: ^To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
; h5 N3 d# H8 \' e. j0 bwould have occurred if housing had been priced
* ]! n7 T3 I# y/ y: A1 Goptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
' u' F! _' J9 C  g) E! s$ O( Tunits were being absorbed, homebuyers simply bought too
* n1 F( ]5 w) T; D) Zmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
8 S7 \6 x) j4 u. P5 S2 kwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
' b4 a8 W+ a( a9 `3 bvery time that the resale market has swung into strong
- h# o+ o% x4 f3 p: ~- F3 }1 Gbuyers’ territory. Homebuilding in the Atlantic provinces
1 k2 u' h4 ~/ r9 uhas 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
% {4 B  f: p& q7 x( U+ wstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
9 q. x4 [# z4 W( t1 g5 r$ jgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
* m) Q: b! l5 P0 rcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
5 Z1 L* z8 f. i7 g* s8 Qcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
" Z5 x3 u7 `! [% f* v, J1 N9 sconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
/ ]% ?" Q! \4 `6 ^% Lcyclical factors would indicate, condo inventories could
/ w3 X4 P! i3 t: N+ m6 j" }spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
7 s) R8 C/ {% N; a5 janticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
+ Q! P# |/ c4 H8 WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
, c& I9 `- B, Y' cMARKET RETURNS TO FUNDAMENTALS
% \2 b' p0 X6 k' v: V/ Y, b* sGrant Bishop, Economist
416-982-8063
. l7 @$ x7 P" g* V- JPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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