TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) N- k2 M- g/ u1 M7 J: Y' hfrom 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
$ H/ Y- V$ j/ \4 ifundamentals by approximately 9% nationwide. This
  U$ x( Z' {( T0 Q+ Soverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
3 ^& |! k; V; n( Xthree years.
5 f, {1 L+ U! N8 p, a" h  @$ _1 {By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
, P1 I0 ^! N' m8 @# Waffordability. The current unwinding of house prices reflects
  Q6 U& B0 ^/ p- x0 b5 g6 zboth 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
# X3 P' f( Q, `% n. B# f: P/ Athat this demand cannot be sustained; and “supply-driven”
" V6 N( ]4 B8 m. _' C$ T0 [! ywhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
7 t, n) g# J2 Z9 m3 l( ?“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
6 P- u2 K( ~, k& t4 g; e% BWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
! W& ]: }1 ~. ^+ Hmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
- c* Y+ [1 W/ l# ~from the cyclical downturn, house price growth will
2 c1 D; O8 V; Aremain choppy and new residential construction will be
9 t+ {! m. M( y3 [2 n- {7 H. s# B" Fdampened, owing to this structural weakness. Construction
5 q7 t2 A  N5 Dis 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
; C$ l  [1 ^8 Uin the fourth quarter.
. P8 D0 V( H( c9 d* e8 |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
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
: n* Z, \. q4 Q4 }5 A! Sof residential construction.
To examine the degree of overbuilding, we employ a
- v. }1 l; d. ]* g8 y- [3 g/ d7 k“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
% _) k9 o8 H1 }" {8 _1 gfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
! B$ c- O) A  f2 A0 K- Y1 Y4 q( U3 hmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
+ a6 [* n6 n( A8 J( Rpopulation inflows. Saskatoon, Calgary and Edmonton are
: P, u* v8 D& y8 Z5 I, ^" r8 Z; calready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
" d3 V$ T6 i/ Rbuyers’ territory. Homebuilding in the Atlantic provinces
8 s: T* |5 c6 W4 D0 chas 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
' ]* ~* z5 i; h( ]6 j/ t4 t! p( Zstrange accumulation of unabsorbed multiples on l’Île de
7 ]  R- D, z6 ~: e8 oMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
5 j; o8 ^* z7 z5 ^0 B4 Q) Jrates. While Ontario homebuilding will reel from a
6 @% H. _* f" Y! T" y( O! j/ }cyclical downturn, the degree of structural weakness appears
! N+ C6 [$ |6 c6 Q6 y+ plimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
* f3 O2 {% W0 c  N9 wconstruction mean that record numbers of condos will
( `$ o; R$ P) z# U. Vreach completion during 2009. If absorption rates fall, as
+ z7 l  F9 x' ~& t0 {5 N: N- tcyclical factors would indicate, condo inventories could
spike 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
) i0 ~! a4 W; J$ r. R& q7 L( einter-provincial and international migration over the coming
5 B) f' f  d% T9 u# uyears, which, along with improvements in affordability,
8 L4 @0 N- {. I7 M1 G$ N1 ^2 t# Dwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
1 G% C! D5 S- b2 W7 T7 e( w) EMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
4 V7 `4 x; w5 [3 `& d7 G  d, R, b! H& iPascal Gauthier, Economist
& s% E/ L  ^) E" ~2 v$ p1 m& c' e& }416-944-5730
& H8 X+ I# ?5 e, ]+ Q* i  r4 e% E
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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