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
' v7 r" H; `4 y% d9 y8 Nunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
. g6 U0 G$ S) s& V) ]  tfundamentals by approximately 9% nationwide. This
- I: v* B2 ?% G" ~: x. Eoverpricing 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
7 ?. R8 C. H/ B# L4 C  ~their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
/ U' c6 J$ U, H( l2 i- I, i* Rboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
5 W: |3 H$ I6 g1 ]# ?0 n; z6 Kwhere homebuyers buy up too many houses and
5 j8 I7 m5 N% [! b" Y+ A* m% @; athat this demand cannot be sustained; and “supply-driven”
+ E# b/ I) R) iwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
% t3 G6 L- O- ]& dWhile 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
' e4 x6 z# F( a4 }, G! A! t0 Uon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
  w' J" X' F- p7 u! ?: {8 {: Qremain choppy and new residential construction will be
. C: J" k5 U& ?dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
: ^) k, N0 `# G. X: vto persist over 2009 to 2011. We anticipate that nationwide
: k9 Y. V6 Y% U/ ^residential construction will fall further to around
( F+ k* M. d/ A. b9 [; C7 `125,000 starts over 2009 with a trough around 115,000 units
; o- Z7 |9 E2 C  jin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
$ }' B% ]; d+ ?# c" d* c6 f: {6 owe first develop an empirical model, based on long-run
; T1 @9 u/ a8 b% U$ y" c' `4 \. j& jfundamentals of house prices and housing starts in each
  c% q7 k; z4 h* hprovince. Affordability is the key concept behind home
8 f, ?9 Q5 S# Vvalues 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.
% O1 q& I9 v* ?2 C$ V( x: ATo examine the degree of overbuilding, we employ a
5 L- W  m5 S# b# a: N( R0 _“counter-factual,” asking what level of residential construction
( I1 q; x9 |! v2 F1 R& Iwould have occurred if housing had been priced
2 x2 }$ _+ ?7 |5 `3 |/ M  ?, U' @optimally. We find that actual homebuilding exceeded this
! ~' R4 @4 c+ ^& Bfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
/ T0 ]% H6 [9 ~many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
! h& }4 J5 _1 R% u8 _# Wpopulation 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 b% ^% U+ N2 \' J6 n: y$ ]6 g5 thas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- i5 p" Z+ X4 q; t5 n4 IQuébec shows signs of strain – especially given the
2 K5 q" C$ o& c6 O3 d1 Dstrange accumulation of unabsorbed multiples on l’Île de
  C: Q6 a4 J# z. d( ]Montréal – but recent building has been relatively balanced,
$ b9 Y3 H0 D! I" M6 A. I9 p+ O" B: Agiven 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
5 o1 G5 h/ N3 scondo market. Both in Toronto and Vancouver, historically
9 F) }( E: D( h% Whigh levels of apartment-style units presently under
construction mean that record numbers of condos will
6 X' s4 p: K+ r, ?reach completion during 2009. If absorption rates fall, as
! n: Q3 V: M: f8 Z; p. K9 a" ocyclical factors would indicate, condo inventories could
3 n  g% ]7 R+ h( r' C6 ~% ~/ G8 u$ nspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
4 X* e; b+ c3 f! [: M2 uanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
; o+ J9 d+ M4 L6 W1 owill alleviate some of the pressure from overbuilding.
3 ^2 ?2 `: S; ]OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
4 K: b; T2 p% A8 q2 O; C416-982-8063
Pascal Gauthier, Economist
2 r  y. G, M, X' Y416-944-5730

/ `7 p5 z1 T- f, y6 jhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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