TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
! B0 e) |9 n% A. s+ afrom 2002 to 2008, unsustainable price increases drove
, l& u! @( h( `0 _- D, qunsustainable levels of building. Our view is that house
2 p+ K) G0 q! {& ?# nprices exceeded the value of housing that was justified by
fundamentals 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
: h' V1 ^: ~; m; ?- {- M* Q1 [three years.
By “overpricing” we mean that prices detached from
" \# y, O( [3 Z: ]their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
& {2 C$ l6 Y  I( uboth a cyclical downturn and a return of house prices
! b/ f9 [4 ~6 V: \0 vto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
; y5 b# l# q/ ]! Z1 v1 o- athat this demand cannot be sustained; and “supply-driven”
5 e/ s5 ^5 _0 [where builders accumulate excessive inventories. Although
4 H# a3 L% s/ Z5 h# Q7 E, H9 Bthere 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.
0 A5 P$ E6 v, W" j% nWhile 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
- |, J! ]7 ]  A! C5 z" _, }) Sfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
9 X; V9 O, @7 R5 @! x( V, X4 Mis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
1 u5 p# V2 x1 p- I0 V+ G7 z125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
* W* |+ \  q, r# ~fundamentals of house prices and housing starts in each
. V5 L# @7 M6 a; Zprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
7 m- x0 ^% h# U9 A; Y% L0 Nregard housing prices and household formation as the drivers
9 A7 _* J3 m9 }5 S8 j9 Y" y" X+ iof residential construction.
4 q* e' \; O% n/ y. QTo examine the degree of overbuilding, we employ a
, [4 s% T- p, `5 Y4 I: D' F! @. t“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
) i1 b! J  x  Z0 joptimally. We find that actual homebuilding exceeded this
% x, O, J& W* h& k6 m# d5 r& \fundamental-justified level by about 12%. Although new
; q4 \! S3 @9 o0 F$ `units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
9 S5 Z9 n" m& @% fRegionally, we see the greatest strains on the Prairies,
; `! \9 b$ U: K$ Q7 U" O! V5 j- f# iwhere housing demand will further contract under waning
# R. f' o2 R; ^population inflows. Saskatoon, Calgary and Edmonton are
2 D7 O' n6 t4 }7 N4 @: s# |already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
. i+ f7 g/ J% obuyers’ territory. Homebuilding in the Atlantic provinces
2 }, r+ H3 `9 d+ t8 M2 thas been relatively balanced but, while not plagued by structural
/ {5 N' c) C& L5 m9 h- Y6 J: `. Rweakness, will be singed by the downturn nonetheless.
6 e: u4 q; Q& l, k/ SQuébec shows signs of strain – especially given the
/ u4 m- L* j! [3 ustrange accumulation of unabsorbed multiples on l’Île de
/ o) K* K( D! d; b9 YMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
2 d9 Z% B/ c0 y" }0 X3 Z6 Q; |rates. While Ontario homebuilding will reel from a
. Z4 M2 }; r0 H8 X5 Ocyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
, T# j0 h. \( d' fcondo market. Both in Toronto and Vancouver, historically
6 S. ]6 k/ A' P5 Y/ \high levels of apartment-style units presently under
construction mean that record numbers of condos will
4 V  B: a7 F0 a* m7 b% m. ~2 F# freach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
, m/ l/ Q4 ]; C% U  zinter-provincial and international migration over the coming
. W: }( v2 S9 h& [4 m3 k4 R6 myears, which, along with improvements in affordability,
( c, o. b4 C7 L* gwill alleviate some of the pressure from overbuilding.
" L9 o3 H( I: t# O2 gOVERPRICED AND OVERBUILT: CANADIAN HOUSING
2 J1 ^6 m( O1 i3 rMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
9 n" i5 e  D) J. }9 }% J- WPascal Gauthier, Economist
- U8 M* P) j# d4 C# j. s+ n- D) Q- e416-944-5730
1 p6 D+ ^& ]0 R2 X6 Y
$ J) t4 ~2 k' [! g" j* zhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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