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
7 l+ r# f) [, E: J+ m/ x) s' {4 B5 }6 ?fundamentals by approximately 9% nationwide. This
; V+ V2 u1 U. k7 yoverpricing compelled a level of residential construction
( S, O5 e" A: {! j6 Uthat exceeded its fundamental-justified level by approximately
" k3 e5 T. F# x8 h5 e0 ?12%, an excess that was exaggerated in the past
9 R/ Z6 d% }4 C. P2 F0 g. {3 `$ vthree years.
( a! m8 C3 Z, z3 d$ RBy “overpricing” we mean that prices detached from
: e3 s9 f# x7 D" }4 C# b: }their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
. y6 _8 I( U+ A# E% N  L) e. _both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
% W) \  M1 y( ~' vwhere homebuyers buy up too many houses and
; s9 N- D  A. p4 e2 \% _that this demand cannot be sustained; and “supply-driven”
1 [5 p' g( W- z/ m* v' I- }where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
- J9 p( v1 r8 V+ q“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
) H0 o; m& V6 n1 s" fWhile most markets won’t face U.S.-style overhangs,
# ~8 I6 h# ]: k1 O2 ]" {0 O( dthe construction of too many new homes over the boom
6 \' q) z% @5 V6 n( H; r; ?6 }means a deepened slump. This overbuilding will likely weigh
; m3 h4 T2 f. P! G4 r" X6 @6 J4 |on 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
dampened, owing to this structural weakness. Construction
7 D; V+ x1 a: q$ i# J/ @is now undershooting fundamentals and we expect this
1 A5 c' G) v, C1 I8 _to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
4 T) v) C6 W: v' a. _' ?8 z125,000 starts over 2009 with a trough around 115,000 units
2 x; N( i  q/ ]6 k; t: ?0 jin the fourth quarter.
( w2 M% h: ^: f0 `2 _: wTo quantify the degree of overpricing and overbuilding,
) g/ z+ e2 I6 Nwe first develop an empirical model, based on long-run
- _3 e( o( |2 G/ Kfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
: P) Z2 c% v- Dvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
* G2 G7 h4 z% u5 E7 Y& ]would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
' c$ y) |! u% ]# kwhere housing demand will further contract under waning
  J) Y9 m- u+ Q3 U& W, [* _4 Vpopulation inflows. Saskatoon, Calgary and Edmonton are
  U* o" [& `: o9 K  G9 Aalready 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
has been relatively balanced but, while not plagued by structural
1 [8 F$ I4 }1 P; K8 i' nweakness, will be singed by the downturn nonetheless.
& Y- J" h: E1 z; v- S% e* Z6 F+ u% DQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
) b6 e5 {+ Z. f: \3 f. i+ T& CMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
! I! T8 @% s8 B( Z8 f0 s8 d* l1 Arates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
% E0 o" m  q. [: i7 W( _condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
% ?. Z. y; Z1 [, R- V7 }3 Gconstruction mean that record numbers of condos will
4 Y% |' N2 Z$ x; ^  d' B6 H  |reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
( t+ A7 t' w: ]% v! `1 e8 Ispike severely – particularly in Vancouver. However, while
residential 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
/ E- m5 C0 w7 e2 Z! Z( Kyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
0 ^3 M7 D% `) x. C, s  NMARKET RETURNS TO FUNDAMENTALS
1 }& Z( M2 E, [% Y3 zGrant Bishop, Economist
( E5 j5 Z, f1 a9 w- n0 U416-982-8063
Pascal Gauthier, Economist
  Z- E9 g; @2 j5 J416-944-5730
& ~! u4 x9 P" S1 b$ W
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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