TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
; r2 }6 y! }6 P& w* F$ ?from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
3 ?: z$ i- p$ Vprices exceeded the value of housing that was justified by
0 q( J" _9 O7 j0 Lfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
3 c6 M- b  j: Z; u9 k& o$ Lthat exceeded its fundamental-justified level by approximately
9 _! C7 k4 g, Z- ^4 v. t* _( S2 g! y7 |12%, an excess that was exaggerated in the past
3 v4 ~4 ]5 y3 g7 @# y( W, xthree years.
1 i, X# E0 A( B( [. ?( [By “overpricing” we mean that prices detached from
" s! l6 {5 Z1 V" _1 U4 l, x* f* Itheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
1 n8 o8 J! W, d" G( \& jboth 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
$ o& _; s! U. M: `$ k- C/ pthere is evidence of both types, we contend that Canada’s
3 B! m4 z# k5 I% S“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
* n2 G+ h+ s/ v! L. Sthat is now being rapidly reined in.
# }# ]7 L2 k: k0 R# T, J& cWhile most markets won’t face U.S.-style overhangs,
  g9 z" C9 z# F% g9 F& _0 y/ ethe construction of too many new homes over the boom
9 Q6 A1 w0 `$ l9 B' Kmeans a deepened slump. This overbuilding will likely weigh
* Q1 h( q! E+ t: J. O  \+ y9 |on markets over the next few years. Even as Canada recovers
- B9 A! X3 K) A. Zfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
2 {7 ]' ?! E1 W: [# ?is now undershooting fundamentals and we expect this
+ D2 t9 A" \* dto 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
5 k/ n7 x; A. N8 k: r; I/ h9 f. v/ g2 Cin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
" W" d! ^1 g$ u: [fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
$ A, g6 P) h: i1 b* Ovalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
; ^; V# A/ ]* n/ g; ^regard housing prices and household formation as the drivers
4 v- B$ H2 H) K( k9 |of residential construction.
To examine the degree of overbuilding, we employ a
7 i% D6 J" F; u8 _; a; W8 `“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
! b; M8 l+ t8 d( K7 b- c- ^- f8 ^! [optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
3 c% n( n4 z( P. ~9 M- @Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
1 q) J2 R  ]4 l  H) Xalready witnessing surges in their unsold new homes at the
, p& U5 E  W, d3 n1 j3 A! _very time that the resale market has swung into strong
$ T% |/ `9 m6 ?+ n# @9 Cbuyers’ territory. Homebuilding in the Atlantic provinces
9 L' |0 Z8 h% O+ I$ Hhas been relatively balanced but, while not plagued by structural
4 @# l. [, E7 p1 hweakness, will be singed by the downturn nonetheless.
( y! V- ]: n9 @; O; VQuébec shows signs of strain – especially given the
. V1 u# q  T  O, n3 a' Lstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
! r: q4 M: F% W, ~6 Lgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
" S5 A8 T( ~3 w) c/ R8 bcyclical downturn, the degree of structural weakness appears
6 |& R4 W5 C# h! {limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
- x1 B9 {& V- a$ _) D: Lhigh levels of apartment-style units presently under
" p" J8 R  L; A. h" Rconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
& ^2 c' R5 P5 Y# ~residential construction in B.C. will definitely droop, we
+ Q5 [! S( [+ ?; canticipate that the West Coast will continue to benefit from
0 ]! H8 y4 h8 G/ D2 pinter-provincial and international migration over the coming
6 P  M$ ~* J& P9 Nyears, which, along with improvements in affordability,
4 k% M( n3 u: ?will alleviate some of the pressure from overbuilding.
+ h" h. X" f0 b  f2 aOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
( ?# J2 u( V. ?6 u; wGrant Bishop, Economist
2 o2 @; s% P3 I$ X416-982-8063
Pascal Gauthier, Economist
416-944-5730
$ n& e1 d6 ~% ]5 C, g5 }) L
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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