TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
$ w+ U. W8 u: P, U# Y( efrom 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
fundamentals by approximately 9% nationwide. This
( D9 i; S$ Z0 P7 g$ N, Soverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
5 }$ \8 V# P0 i7 ~their fundamentals, as witnessed by a steep erosion of
' g- G" B  r3 x1 oaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
: z3 k+ }1 K$ yWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 S, B' R' C, K2 H+ e3 X2 [( lwhere builders accumulate excessive inventories. Although
" k& x( Z, z( f2 Y. @9 b& Gthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
; V6 {! L" }$ V  Ahomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
& g* \3 Y. e" V& H+ K! h+ p& |the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
6 c, B% i( O5 F  Y/ @! u* cremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
/ j) h/ V8 v7 A; s6 Vis now undershooting fundamentals and we expect this
) @5 J4 ]0 k+ M" w$ Sto persist over 2009 to 2011. We anticipate that nationwide
' w6 L- W' m4 o( y1 Q& Y, N$ l. presidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
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
province. Affordability is the key concept behind home
, y  n8 u8 q7 `0 c5 X" ~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
of residential construction.
* l- p; l. I. `. E9 [3 KTo examine the degree of overbuilding, we employ a
( K/ ^9 Q& ]* D5 p- V0 D. D, P“counter-factual,” asking what level of residential construction
6 l- i$ o9 n; E# Y9 Rwould 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
; h( Q" T9 o9 fmany houses at prices that exceeded fundamentals.
- [6 k6 b. O7 @+ e- [8 P, S# ERegionally, we see the greatest strains on the Prairies,
  N- r  K; Y2 X0 f3 l5 G# }! k6 C& mwhere housing demand will further contract under waning
3 E1 o4 h4 l  K2 ?" jpopulation inflows. Saskatoon, Calgary and Edmonton are
$ i3 p/ h6 u6 U1 t' Malready witnessing surges in their unsold new homes at the
( O% i" k+ a1 `+ Lvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
( B8 B$ w1 n+ E! \! }( T) Shas been relatively balanced but, while not plagued by structural
( P. J' C1 Z8 Q, p3 Z2 sweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
8 s6 G$ O9 x2 b2 p5 qMontréal – but recent building has been relatively balanced,
+ r: ~( `3 [* J4 cgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
; W% F  q' Z. c( Ncondo market. Both in Toronto and Vancouver, historically
! o6 f" ~$ f9 d& o! u, Nhigh levels of apartment-style units presently under
6 n! v5 N8 Z& ^( q: uconstruction mean that record numbers of condos will
1 d) n4 G9 p* |6 Treach completion during 2009. If absorption rates fall, as
( P% n) I4 s8 |cyclical factors would indicate, condo inventories could
( z5 v' B6 m& dspike 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
/ B5 [+ \: V4 jinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
- |, h6 n' w4 [( d! hwill alleviate some of the pressure from overbuilding.
: Y% @& x+ B( J" }8 E: vOVERPRICED AND OVERBUILT: CANADIAN HOUSING
, A) z. ^5 b" k2 S- jMARKET RETURNS TO FUNDAMENTALS
8 x: P2 M+ I# N7 i- mGrant Bishop, Economist
  A: k; ]+ p1 y416-982-8063
* _6 l5 z7 _9 g9 VPascal Gauthier, Economist
4 I  g4 W, U  G' U7 u416-944-5730
7 b8 ~7 B, [2 O8 K/ G) @1 n
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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