TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
$ |. p; N  r: H$ {0 Ufrom 2002 to 2008, unsustainable price increases drove
5 v% \1 u. s+ r; @# ^2 Aunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
1 ~/ v" n4 B+ z* n' n0 z: |12%, an excess that was exaggerated in the past
three years.
& U  B$ K% h; c7 z2 ]By “overpricing” we mean that prices detached from
0 d0 Z& g( n! d, ~their fundamentals, as witnessed by a steep erosion of
$ P; W- F0 p9 Y5 `" Faffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
, _, H* O, A" K% ~9 l3 `0 W3 R% bto fundamentally justified levels.
- U* s% u( d# o' AWe consider “overbuilding” of two forms: “demanddriven”
5 ~$ o5 ^( H0 Kwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
  r+ d0 Z6 O$ X. H4 f0 nthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
! W2 Z: [0 y" U, Vhomebuyers pushed homebuilding to an unsustainable pitch
4 b4 Z- m& d/ jthat is now being rapidly reined in.
7 h: r& z1 `! C7 O5 |While most markets won’t face U.S.-style overhangs,
6 k4 o# T/ N$ k4 e5 m) J$ M. Kthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
( V2 c4 [  u* }; L9 ], |! t5 ~on markets over the next few years. Even as Canada recovers
7 J' J; y) I) s) r# p$ [from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
0 @, w) x# D" ]& xdampened, owing to this structural weakness. Construction
/ m# [7 q% l- h8 wis now undershooting fundamentals and we expect this
6 A0 r6 W6 i. B: yto persist over 2009 to 2011. We anticipate that nationwide
! O$ j; u* _7 ?  P2 h6 L5 `; eresidential construction will fall further to around
+ I+ j' Q/ t; W1 ?6 M125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
; m/ E8 }; O+ ^# V* f3 G) bTo 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
* v+ {8 a3 u6 a; R5 cprovince. Affordability is the key concept behind home
( Q. O3 H. c# F. xvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
3 t5 X/ |  r  n# Tregard housing prices and household formation as the drivers
+ {) e0 A2 y  {) X  _/ w, J+ v5 }2 b  Qof residential construction.
0 q0 P, \  @2 u4 L" ~% uTo examine the degree of overbuilding, we employ a
( n9 p2 e$ P1 |/ b4 w* c“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.
% M# q3 `  Q/ H* r3 B) @Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population 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
buyers’ territory. Homebuilding in the Atlantic provinces
9 D; H( N& ~  H' ~- W7 L, ]5 l$ n! Mhas been relatively balanced but, while not plagued by structural
9 [+ z" Z6 G! [: tweakness, will be singed by the downturn nonetheless.
; d8 s/ G0 v0 O. U- p! TQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
1 \3 k1 g7 q) e2 F- `) Z! ?Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
$ ]2 i# c( M9 krates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
4 X, m' ]. S9 ccondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
& Z0 H! Y- `8 B  A, C7 lconstruction mean that record numbers of condos will
4 q0 p+ P1 l% B: s& Ireach completion during 2009. If absorption rates fall, as
8 j8 N! i+ ]+ I. r: icyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
  r. L+ t6 u* T+ Y# |$ zresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
) L1 M8 V0 M2 f. Finter-provincial and international migration over the coming
. R8 d: {3 a: T. D1 k! wyears, which, along with improvements in affordability,
$ s: z  O2 a0 ~% ]will alleviate some of the pressure from overbuilding.
: K& {. h% A% R- d9 x1 dOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
; d! y/ m& @# n* Y4 T) P! hPascal Gauthier, Economist
416-944-5730
; r% V$ H/ f/ Y( [7 }# A
, Q" {" a$ w8 U) k+ A) zhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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