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
& r' e8 l3 ?: p0 `8 f/ \8 eprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
* G- a$ v& K) N9 J' doverpricing compelled a level of residential construction
2 C% B0 ?. y5 r) L% Othat exceeded its fundamental-justified level by approximately
  |2 s# n% O# D% e12%, an excess that was exaggerated in the past
1 K5 ~, w, A2 \8 @. uthree 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
1 g9 u  v+ e, i+ u! bboth a cyclical downturn and a return of house prices
1 \8 {- C, b# {) D. `to fundamentally justified levels.
* ^# g  V& ]% `8 F) O7 g- k  ?We consider “overbuilding” of two forms: “demanddriven”
2 f! I: _: y8 A( `) q# Z; Qwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
' `: F. `# v+ E. A* @where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
8 }: n! ]# M5 f“overbuilding” was mainly of the first type, where
) a( G: ^- w5 `/ X0 X- B1 Yhomebuyers pushed homebuilding to an unsustainable pitch
7 h# q  R$ w/ o7 q. ]9 xthat is now being rapidly reined in.
' {% g* f2 Y6 E" }' Q9 n, cWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
1 M; T4 ?3 j& e- R+ A1 {3 Hmeans a deepened slump. This overbuilding will likely weigh
  G# [4 A, S, n; A5 ^4 }) ~7 ^# qon markets over the next few years. Even as Canada recovers
  c$ d) E/ {) U# `# ?- j8 Mfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
6 ]9 w- i1 R/ I' Wdampened, owing to this structural weakness. Construction
1 z+ S0 ^; `% Q' K  p( m; J. [is now undershooting fundamentals and we expect this
' e, Q8 l( k: d. s# Fto persist over 2009 to 2011. We anticipate that nationwide
, B. q+ B/ o- }9 o  uresidential construction will fall further to around
3 t  r4 J" w% K7 [. p1 _1 b$ J+ E4 d125,000 starts over 2009 with a trough around 115,000 units
9 q7 E+ X  n! {  ]in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
+ D5 r; }6 g+ u+ u/ wprovince. Affordability is the key concept behind home
4 P7 ?- E1 a+ j' T" n+ O' r0 Nvalues 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
& S* z7 `" S0 D# o# oof residential construction.
3 h8 j+ Q' Y5 [( _6 CTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
& i. O. C/ ]' vwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
# j# o$ |5 Y* y. u* \fundamental-justified level by about 12%. Although new
# q! `7 p- t1 funits were being absorbed, homebuyers simply bought too
3 H' X  ~7 A% A5 Bmany houses at prices that exceeded fundamentals.
) N/ K7 m; |3 M3 YRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
1 I2 E7 _% `: U& R" T8 cpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
, P7 C- |; [3 P' Jbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
, `. O  U+ ^- W" N, G' q7 ^9 |weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
) y+ i* P5 ~' u* E4 \cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
6 \) z$ B' y# r. N) I/ |6 h/ |reach completion during 2009. If absorption rates fall, as
3 Y3 L; h( V- {' c1 b7 H" Tcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
2 N: t& }& ^1 E. R5 `: h( |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
: S8 j7 T, e' Z# ^years, which, along with improvements in affordability,
, e: s0 j) {: i+ f8 W+ B$ Rwill alleviate some of the pressure from overbuilding.
. c6 o% D: Y6 K- p, ?6 JOVERPRICED AND OVERBUILT: CANADIAN HOUSING
9 A- w3 k! r7 A; H* WMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
- v9 X  @+ d: M- N& C) |Pascal Gauthier, Economist
416-944-5730
7 {$ `- ^* J  }) U5 [# {
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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