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
7 N2 g: }8 v2 M; c. G* lprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
8 ?% ~' S- b, j8 ~" d5 k  ~* o$ t1 Vthat exceeded its fundamental-justified level by approximately
: w' ~; b5 N$ w% Q12%, an excess that was exaggerated in the past
three years.
9 l# e9 Z. v; D/ u, s9 p  tBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
. O5 _$ ?5 V& d. `0 r* zthere is evidence of both types, we contend that Canada’s
5 o5 K* @: S/ x: k  ]8 y* ]“overbuilding” was mainly of the first type, where
4 ?0 J" @( I4 n* J0 {+ dhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
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
6 o0 {  k' `9 H2 hfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
+ y& f' ]( u! X' O4 w$ ndampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
) x) c0 {% g+ h5 [/ v2 Cto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
; @5 g) L5 H2 B5 S# U- K" [+ U) t125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
! u. D+ u/ S" S0 Q- E* T, KTo quantify the degree of overpricing and overbuilding,
& B- L3 R( q7 @8 ~( owe first develop an empirical model, based on long-run
6 W) h3 r  \* Tfundamentals of house prices and housing starts in each
; Q$ L; O0 g- ~2 r. j3 U: y8 Xprovince. Affordability is the key concept behind home
! G: z( d# N+ [* z' Yvalues since house prices should track incomes over the
' R3 F; W* t9 c- Y( wlong-run. Since homebuilders build to meet demand, we
! ~( d. W. u( v5 [. Yregard housing prices and household formation as the drivers
6 h1 \& t8 v, N: a% kof residential construction.
To examine the degree of overbuilding, we employ a
7 d1 h% z# B$ w8 s9 ~8 [“counter-factual,” asking what level of residential construction
: s! k* G; p* l$ _0 zwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
* ]- y, d8 }& b% ]( ufundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
, {" Y4 [% E6 X/ h9 E* r: l' zmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
7 E6 \% C: a2 W4 J  s9 |& B8 Npopulation inflows. Saskatoon, Calgary and Edmonton are
" w: R5 [8 u5 q% F+ ualready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
0 u3 f0 w8 `& F2 d; [; B2 Bbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
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,
# W8 h) Q: J. l% X# H0 Igiven the province’s history of under-building and low ownership
6 w$ ^- u9 B8 `9 O& o& z' `rates. While Ontario homebuilding will reel from a
* ~- @2 z: Q6 v" s! ?cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
6 T; F+ s. B" T* K# Whigh levels of apartment-style units presently under
5 u0 j( N+ P8 D8 ~+ g$ kconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
) f6 s: _# m" ]* P) Q# ~cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
6 W4 q& P1 ^; {# i( j9 p) zanticipate that the West Coast will continue to benefit from
, z+ [: w; l3 x( yinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
  s6 ?: G! v( R0 q4 _, X4 ]will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
1 q7 d9 J& H) J/ [! L2 c! cPascal Gauthier, Economist
416-944-5730
: y- m. V* C9 ~0 b; w! F
# U& k$ a- Z5 Q+ `) rhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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