TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
0 \& V8 j% r# Q6 `$ a6 B% dfrom 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 Y2 q% J8 Y8 |) [" Lfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
" }. b) U3 n' K  f/ jthat exceeded its fundamental-justified level by approximately
1 k9 ~) d# Z- L12%, an excess that was exaggerated in the past
, @) O2 K4 y6 c# ^' c2 R- f- rthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
) x3 p0 p% a* [& x0 ]both a cyclical downturn and a return of house prices
% i6 `8 `' h3 f2 Hto fundamentally justified levels.
% S1 Y5 z! z& p$ g; B! FWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
& I; s9 d" L5 B0 X  S+ pthat this demand cannot be sustained; and “supply-driven”
( R% C- d6 Q7 A7 Gwhere builders accumulate excessive inventories. Although
7 w8 E) Z' r: B! U# q+ U! Z4 Ethere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
1 _5 _: o& X% x3 Z# o. Lhomebuyers pushed homebuilding to an unsustainable pitch
9 Q1 ?- n' H/ m/ q. B' mthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
, ~9 R+ L) I7 @- \5 Gthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
$ a9 q7 N4 l' b! e+ b# oon markets over the next few years. Even as Canada recovers
2 |  l3 ?% }& p8 ufrom the cyclical downturn, house price growth will
! O) F4 n8 x# S5 _/ c! N3 Kremain choppy and new residential construction will be
: n- s+ y5 _# X" W! x6 F2 m# g! m4 Bdampened, owing to this structural weakness. Construction
5 b$ T$ h, Q9 k, z: cis 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
' \4 x( _) H$ G* o  Gin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
6 M- V% D/ H7 x' I3 x% B  w2 w7 Y! jwe 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
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
& U! J9 s! Y3 I3 b/ k+ P- b( }' |of residential construction.
- }! q' ]% j0 y% ~2 n: ~9 GTo examine the degree of overbuilding, we employ a
- V3 p, Z4 a* \! O# y“counter-factual,” asking what level of residential construction
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.
' F  w' [/ z) A, [% e' F2 {* iRegionally, we see the greatest strains on the Prairies,
: {& P8 G/ N# x6 ?- T) Uwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
" i  Q8 ]  ~# C, s: u0 Kalready witnessing surges in their unsold new homes at the
! l9 ?# e1 a  e3 k: D( Lvery time that the resale market has swung into strong
0 u( h) W: v4 l2 p# }buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
8 y8 ?" t/ p: H8 ^7 Lweakness, will be singed by the downturn nonetheless.
; O' a+ A( \/ i3 a! R, bQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
/ y* U1 `7 J$ ^) sgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
- l( n, B0 ~8 z' |cyclical downturn, the degree of structural weakness appears
  }, [0 m  z1 Z6 H5 ^  H$ Z9 flimited – with the important exception of the Toronto
- \, Q9 T& [8 [$ |! L* W" ocondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
9 M3 |8 V6 L: A% z5 Ncyclical factors would indicate, condo inventories could
$ F( o6 P& H1 ospike severely – particularly in Vancouver. However, while
5 w8 N- d4 f+ ?2 o( R' Fresidential construction in B.C. will definitely droop, we
% Y8 c9 Y4 b0 _6 B+ ^& j1 y. Qanticipate that the West Coast will continue to benefit from
! l; }( a; g* [- Ninter-provincial and international migration over the coming
* g; u3 v& `7 N+ Eyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
5 T6 ?3 T. x+ g- Q1 `$ B8 ^4 s: m4 pOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! @" z& G) ~0 k9 n. h. l2 eMARKET RETURNS TO FUNDAMENTALS
" \+ i3 U8 c; @% u1 I- q! ?  uGrant Bishop, Economist
416-982-8063
' z4 |2 x" N% N5 z* G) z  Z+ \0 DPascal Gauthier, Economist
. @+ g4 E& |8 Z3 v/ \3 t" l416-944-5730
( g& F7 @: D: v) }0 G) p
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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