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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly7 B& f  f% {3 I3 W' @2 D
from 2002 to 2008, unsustainable price increases drove' ?/ `. }# `* H' s* {7 l5 K
unsustainable levels of building. Our view is that house
/ Y8 g, U) J+ M  F/ w; `prices exceeded the value of housing that was justified by2 o. \; K$ x( Q+ A1 z8 K/ {
fundamentals by approximately 9% nationwide. This
8 ?5 ], G8 Y% K! c( f4 toverpricing compelled a level of residential construction
# `) J" Y/ C8 E% _, P1 Wthat exceeded its fundamental-justified level by approximately8 e( N: f+ d/ \' t& h' `8 F* h
12%, an excess that was exaggerated in the past6 k; }- S+ q7 X# n
three years.
: v6 U( P. z5 z, X" ZBy “overpricing” we mean that prices detached from$ j+ ?  y; _! S/ V' Y+ {3 _5 H
their fundamentals, as witnessed by a steep erosion of/ f9 ~, U. A- l, h& A( v0 Q% W
affordability. The current unwinding of house prices reflects
0 X1 S! ~0 @9 |* _3 S' c5 m+ U+ oboth a cyclical downturn and a return of house prices4 b9 d- W, Y5 m" l2 x
to fundamentally justified levels.
" K9 x" a  W0 t0 o" g6 F* \We consider “overbuilding” of two forms: “demanddriven”
7 y* V3 K! x4 _0 I' Uwhere homebuyers buy up too many houses and
% e+ o. V# ^) N/ x3 X1 x" Ithat this demand cannot be sustained; and “supply-driven”
: S  z6 u% e6 c& b. bwhere builders accumulate excessive inventories. Although# q* e; F% e  p/ n# e! L
there is evidence of both types, we contend that Canada’s% y' m1 W" p  @8 n9 W
“overbuilding” was mainly of the first type, where$ o& S& S) ]) ?! A0 y* @, i% {
homebuyers pushed homebuilding to an unsustainable pitch
& Y$ d" J' E1 \that is now being rapidly reined in.' ]: V5 ^+ Q( x1 {4 E2 C5 R
While most markets won’t face U.S.-style overhangs,( Z* @; k0 y: j2 T+ F+ Q1 v6 m
the construction of too many new homes over the boom/ V  }" d. k- X# m5 d  }, t2 B
means a deepened slump. This overbuilding will likely weigh
$ U* L" [$ @" }# aon markets over the next few years. Even as Canada recovers
' j4 Y- s7 m! c0 w5 v; n& M0 [) `from the cyclical downturn, house price growth will, g' B  O6 l# V# L: \
remain choppy and new residential construction will be
$ K5 {8 U8 k4 B  Adampened, owing to this structural weakness. Construction4 ?  @1 @! R% [& G- `$ j
is now undershooting fundamentals and we expect this
8 U$ A- h* s3 ]& X4 Y; P2 fto persist over 2009 to 2011. We anticipate that nationwide9 t9 Z% z# Q, M, W6 p7 A7 D( u1 p
residential construction will fall further to around
: ~& `9 t5 B0 t% k125,000 starts over 2009 with a trough around 115,000 units
1 x0 Z; k" u5 vin the fourth quarter.' c" X# [. O" I- |# H
To quantify the degree of overpricing and overbuilding,
' S7 b% G/ O- m% q/ w7 kwe first develop an empirical model, based on long-run
, e5 D9 m2 j$ y- U' n% w! g6 Cfundamentals of house prices and housing starts in each% t/ ~' J4 i2 Z! @
province. Affordability is the key concept behind home
: q' p$ \3 [; ^/ V9 X0 |values since house prices should track incomes over the
2 X" q+ [* D5 d% olong-run. Since homebuilders build to meet demand, we: m; e! d6 R) c; _6 K, S
regard housing prices and household formation as the drivers" }. u2 n% w, |" L8 c
of residential construction.5 p& B. K# \7 c
To examine the degree of overbuilding, we employ a+ c- |) a" T+ }" E3 O
“counter-factual,” asking what level of residential construction& d, K! X9 `6 Y) u! }
would have occurred if housing had been priced3 D; i* e$ y: _! L+ d) ?
optimally. We find that actual homebuilding exceeded this% x$ `2 e7 {1 k% Z# H! o
fundamental-justified level by about 12%. Although new
, W7 T0 k; v. h$ {0 Bunits were being absorbed, homebuyers simply bought too
# O5 V; ]) H1 \) v- V; q  Imany houses at prices that exceeded fundamentals.
; S3 \: f6 Z: R' b. DRegionally, we see the greatest strains on the Prairies,
( D- W' D6 c0 y/ Awhere housing demand will further contract under waning3 P, X# u1 q7 L4 `
population inflows. Saskatoon, Calgary and Edmonton are
/ ~& r  k! [( J5 l. x" A0 ~- k7 falready witnessing surges in their unsold new homes at the2 N0 B6 p& O  Y2 }# J  i" g) n
very time that the resale market has swung into strong
; _" x0 l$ x) F( e1 mbuyers’ territory. Homebuilding in the Atlantic provinces+ a' N  z& n3 H6 }, O
has been relatively balanced but, while not plagued by structural
9 o  q" p2 I+ g& q5 {: h5 Rweakness, will be singed by the downturn nonetheless.+ o$ t- P* R$ Y1 ~2 `1 R! Z
Québec shows signs of strain – especially given the
+ U+ B9 O: R) A' [3 Nstrange accumulation of unabsorbed multiples on l’Île de) T0 d/ D. C- }/ f! F
Montréal – but recent building has been relatively balanced,* h9 M2 r6 X6 l
given the province’s history of under-building and low ownership
6 `) `: x; Q4 ]4 frates. While Ontario homebuilding will reel from a
/ i* q- u! l* u  L  Fcyclical downturn, the degree of structural weakness appears
+ F  y5 c* E1 J7 d. L( Zlimited – with the important exception of the Toronto" l- g7 |2 G1 b4 `/ m9 M
condo market. Both in Toronto and Vancouver, historically# H' U9 E, R: K7 @
high levels of apartment-style units presently under8 O9 y; i( Z. l. f! Y
construction mean that record numbers of condos will
% Q# C, G4 m$ A  z% p  h/ b# X  {- treach completion during 2009. If absorption rates fall, as
0 w' A3 Z4 [0 J' e/ ?. {3 Kcyclical factors would indicate, condo inventories could
; v6 K# }, a  U& Espike severely – particularly in Vancouver. However, while, E9 k4 v( V  D( }
residential construction in B.C. will definitely droop, we, k7 o" |: G$ v7 `
anticipate that the West Coast will continue to benefit from
. T8 Y6 T. y1 y- f% a& D$ I: ^% jinter-provincial and international migration over the coming
+ U4 Q$ i2 N* O- E% X2 ^/ [- r, dyears, which, along with improvements in affordability,
* q9 {; I( w3 }  L2 Swill alleviate some of the pressure from overbuilding.
/ ?8 l7 E: J, M6 f( ?+ L$ i6 ~OVERPRICED AND OVERBUILT: CANADIAN HOUSING8 P/ ~3 q) b0 w+ i* A
MARKET RETURNS TO FUNDAMENTALS, r5 G% g/ I3 n/ [( {( X; J. ]3 f
Grant Bishop, Economist5 ]% r- Q' s1 @# X# x1 l) r3 v$ |
416-982-8063$ Q* u8 b! b7 j- C; a4 s+ Y# P
Pascal Gauthier, Economist& @  V  M! c( M' S& u+ ], {( T
416-944-5730
& B* j! y6 v4 k6 g
  Y* P: ?% t9 X& b0 a' B0 \http://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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