TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
! w# h0 v+ v0 d+ ~) m2 [3 h' Tfrom 2002 to 2008, unsustainable price increases drove
8 Z9 W0 r* R0 `' O2 _( s0 iunsustainable levels of building. Our view is that house
+ J' o: H; T6 Y- jprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
. G3 S9 t* c3 c0 gthat 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
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
, L  C+ Z- X( bto fundamentally justified levels.
  t# j+ }! I1 k  p/ |! sWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
( d* e  j2 u* C+ V8 p' y: Kthat 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
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
, D7 G/ [; E" T- K% ]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
  n1 ^; C9 V" z6 j% mmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
& j' x5 ~) x# J( A3 j- ^# Sdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
  u. g. C# [1 _, G( rto 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
7 C/ U+ C" W1 ?7 `, ~3 M+ Vin the fourth quarter.
& O9 I- r/ s! g) h& L: O' QTo 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
9 I4 z- w. z# {3 wprovince. Affordability is the key concept behind home
. o' _- }& ~" I  M+ I' dvalues since house prices should track incomes over the
. Z& J* o% z0 t/ F3 D( F  K. o/ xlong-run. Since homebuilders build to meet demand, we
5 A, v' v0 Z8 T# f& ^% E7 Lregard housing prices and household formation as the drivers
) `9 c" s) I. Iof residential construction.
, d) @+ B) |6 j' V+ H* @To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
  `7 C9 H' `0 X2 A8 F9 Qwould have occurred if housing had been priced
9 X5 A5 A9 N' S: r" Z- ]0 g9 L5 P5 Moptimally. We find that actual homebuilding exceeded this
) r3 |6 [  j8 w% t  Lfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
' B, I# p0 L, |( ?/ rmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
8 T2 C7 y2 h2 m8 D9 |& G' N4 Swhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
% ]: z  A/ s3 zalready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
. @4 X. C8 C5 O9 o$ abuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
# K" N5 H- \. X) o1 u8 E4 Y4 JQuébec shows signs of strain – especially given the
. x" F3 P9 A2 `+ M+ Y% ^) Xstrange accumulation of unabsorbed multiples on l’Île de
6 `9 z9 k* U# Q1 M# l3 F8 MMontréal – but recent building has been relatively balanced,
+ I; l' m9 u6 d6 N9 Y4 t- }0 Ugiven 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
8 T0 q& k# a& wlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
/ r: \' `& _  B+ L/ z" M' aconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
5 o5 X5 b+ U+ gcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
% Z6 \# l( q" S+ h% xresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
' e/ O5 G. m  ~/ w( {- w) _inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
1 i' n- q9 Y/ g9 W3 S8 d0 Q2 XMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
  t2 H2 I" E  B: c" s. J7 j416-982-8063
Pascal Gauthier, Economist
416-944-5730

# w2 E2 o( Y, }: u( ^5 I3 f5 Y2 ihttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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