TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) Z/ f8 t. G% O( u: gfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
  h- q) z' r% j, _. s' o* oprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
* r# u8 \1 y4 d/ M% z2 d! roverpricing compelled a level of residential construction
9 e9 E% q- H( ~' S+ Vthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
4 a8 O6 Y- T* ythree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
- K5 J, R( ~4 g% U1 m5 fboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
+ o0 e8 V- V1 {1 BWe 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
8 R- q! k  l* o) j' q# fthere 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.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
  T! U% y0 e2 Q7 Wmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
: k+ ~! Y0 v, i8 a7 Xfrom the cyclical downturn, house price growth will
3 o. R' ?4 s4 u" n2 s$ }remain choppy and new residential construction will be
3 ~- C3 i  j+ e) Q6 K1 Ddampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
+ j6 O7 ]  T0 y- Z3 \2 T2 Z% x- ]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
in the fourth quarter.
& a4 h4 k, D: z# P! PTo 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
6 E/ O3 G! `& k% }) h4 P% fprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
7 T! T0 w' f5 o9 C- l$ g, X4 Tlong-run. Since homebuilders build to meet demand, we
4 P' ~) B7 b% D3 f- \; G! Aregard housing prices and household formation as the drivers
7 m/ V" d% b$ k) ]of residential construction.
& i2 Y6 Y( j3 Q# P2 PTo examine the degree of overbuilding, we employ a
- H3 ?2 j" Q/ f' T3 x9 u7 ~1 L“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
9 d6 J2 I+ {  E! E- T7 Wfundamental-justified level by about 12%. Although new
* ?* Y7 c; ^8 m* y& sunits were being absorbed, homebuyers simply bought too
  v) l& ?  W$ y- V& ]  Amany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
8 M, V. Z' O5 x, C& V0 _0 valready 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
6 U+ i+ W' [* d& Uhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
2 t4 `! X6 A# aQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
4 C* n, U" Q' _. K0 cMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
1 {2 Y/ |3 _$ Q6 Hcyclical downturn, the degree of structural weakness appears
& v$ L( l% H* f( n' k& Plimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
  w3 ?. F, Z" C/ Bhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
: [" K; c( m& F( I" l5 ?! E. Jcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
1 ]! f" {5 Z; j" ?' [# lanticipate that the West Coast will continue to benefit from
2 i! A8 C+ v5 I$ Y9 V0 g1 cinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
$ d1 y$ W1 V% Y4 s5 ~will alleviate some of the pressure from overbuilding.
" }8 b" b$ s! GOVERPRICED AND OVERBUILT: CANADIAN HOUSING
# v% e$ p  B0 g! D; nMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
0 h( D1 d$ A' Z& P/ v  N9 C. L2 GPascal Gauthier, Economist
5 i; g) o7 k) y. I" j8 S  m. n416-944-5730
/ w  |; R) |. V' q
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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