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
& a' h3 d9 N2 _- \( j/ Wunsustainable levels of building. Our view is that house
+ k' s0 T+ f0 N1 [prices exceeded the value of housing that was justified by
: ^7 P& v' P9 ?3 ?5 Yfundamentals by approximately 9% nationwide. This
overpricing 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.
; b& P1 J8 p/ Z) `2 S! mBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
9 S, ?( H% M5 ~# J5 laffordability. The current unwinding of house prices reflects
* F* ^6 F/ U# u* Oboth 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
there is evidence of both types, we contend that Canada’s
' Q6 a; ~2 q% \+ n& ~6 Z+ W8 u“overbuilding” was mainly of the first type, where
: X6 R; F2 Y, _8 r4 I* ^, Phomebuyers pushed homebuilding to an unsustainable pitch
  c8 {9 b' K* p9 M  qthat is now being rapidly reined in.
( o/ j9 x- m2 |0 [1 W8 B9 Q) cWhile 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
1 L4 P" s0 ?! I9 l1 l8 P- W; Tfrom the cyclical downturn, house price growth will
; W- w$ z# p4 C5 P! k5 V* ^remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
( Z- R* L' _* S& q4 {$ Q) o4 Cresidential construction will fall further to around
/ }! o7 \/ B$ y; O# [7 B# w* R125,000 starts over 2009 with a trough around 115,000 units
2 j' ^2 R* d- g# U% d8 Z% v$ jin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
+ o) t2 ^  J# l, Nwe first develop an empirical model, based on long-run
2 y* v& ~$ G0 t  z* K% L* Q$ yfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
& g& D3 F1 @  Q1 ~values since house prices should track incomes over the
% U3 W- f: g. |1 P$ [, Nlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
2 \+ t! W  u4 I/ _of residential construction.
# W% V8 E( D9 m& d4 eTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
* g/ P5 h, y  u' F( d  S3 hoptimally. We find that actual homebuilding exceeded this
5 F" V* x+ k  |" ~. |& [8 Kfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
( V5 T+ ?  ~& awhere housing demand will further contract under waning
3 r3 C8 f' V. P' b; z2 ipopulation 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
7 l0 i  f9 \, a& ?& x/ d6 p8 j1 nhas been relatively balanced but, while not plagued by structural
& t% K, n( `' S5 Hweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
( A: A) l+ X3 J4 Z. |) D5 Qstrange accumulation of unabsorbed multiples on l’Île de
3 P" C$ f: P* j9 [* @8 C: d3 j7 aMontréal – 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 L3 h3 Q9 Q6 U- jcyclical downturn, the degree of structural weakness appears
2 W* j+ s) c( X; Qlimited – with the important exception of the Toronto
1 C) g! O0 k% W+ t8 p% xcondo market. Both in Toronto and Vancouver, historically
4 {4 l5 N$ {$ n+ V4 C7 dhigh levels of apartment-style units presently under
3 |; E+ Q- R9 L) H. i& m! k4 Z4 |construction mean that record numbers of condos will
7 B& z; p8 q& ]" z% ]" a9 P! `reach completion during 2009. If absorption rates fall, as
* q5 Z" h) V) K3 G6 mcyclical factors would indicate, condo inventories could
. R) O0 S4 t) t4 C3 Xspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
* h' ~2 }9 V2 Z1 t1 _anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
" [2 |3 M3 J! W2 M# Q. ^# q. J* Iyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
* U  w& c1 n' G1 z- w8 pPascal Gauthier, Economist
416-944-5730
3 [# _3 T& Y7 D! @! Z1 V5 j; F
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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