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
4 Q* C0 o. _, Q  Y- o8 j! vunsustainable levels of building. Our view is that house
5 [" p6 t: {9 T& D: dprices 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
# H7 J- G; K) G  C12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
3 V" O0 T1 A, v2 J2 w5 gtheir 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
* J% v6 a9 t, N4 t% \7 B& \0 B) m6 @to fundamentally justified levels.
% M% D! V! b  m7 @: FWe consider “overbuilding” of two forms: “demanddriven”
* |% S1 ^0 R( b0 l8 mwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
% g( _$ s" E/ ?# n6 O0 Xthere is evidence of both types, we contend that Canada’s
) n/ d+ v/ Y; q' y. ?0 I: j- E- M“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
" _- Y! P9 F( i0 \- m) H5 r! qthat is now being rapidly reined in.
  T2 ]+ i( A  z1 t3 {% P5 VWhile most markets won’t face U.S.-style overhangs,
: P* F- q' c  M1 {- tthe construction of too many new homes over the boom
2 o1 M( u: s5 A' mmeans a deepened slump. This overbuilding will likely weigh
$ N* G7 L3 _  C3 F. n" Con markets over the next few years. Even as Canada recovers
& D' Z8 _% A6 V) [+ Afrom the cyclical downturn, house price growth will
. \: ]$ p  C4 w/ c' q  Mremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
- I( `' `' G9 Y$ Z4 x# T: ~5 |( dis now undershooting fundamentals and we expect this
( |. Z, j# W. h% qto persist over 2009 to 2011. We anticipate that nationwide
2 W+ \" w% P" D& G6 Dresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
- h- g, W8 K( d! w, zTo quantify the degree of overpricing and overbuilding,
( k1 U. h: d/ r1 J6 N( y  E9 pwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
values since house prices should track incomes over the
4 m1 h* H0 D3 s9 J- ^0 U0 L( Glong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
* m% v8 u5 O8 j. wTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
- T% f" j) F. o* u+ L* }9 F& ~0 Pwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
' Z0 N) S' f& u) U  kfundamental-justified level by about 12%. Although new
8 _7 I2 l, n( H: I$ D% W5 k6 lunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
9 N1 _8 y; U1 ORegionally, we see the greatest strains on the Prairies,
# L+ i7 n2 z* e+ `; \where housing demand will further contract under waning
' K/ f' E: w* y  L! Qpopulation inflows. Saskatoon, Calgary and Edmonton are
! M4 Q$ P1 |2 d2 \% r0 }- w9 Talready 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
4 y' [! U; @; N+ y, t) uhas been relatively balanced but, while not plagued by structural
: n' m6 [' H# e. T( B) ]weakness, will be singed by the downturn nonetheless.
+ X0 w& I# x  [1 o  {4 KQuébec shows signs of strain – especially given the
* Q. Q* U) ]* S$ m3 rstrange accumulation of unabsorbed multiples on l’Île de
Montréal – 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
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction 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
residential construction in B.C. will definitely droop, we
0 p2 f7 T/ g/ uanticipate that the West Coast will continue to benefit from
9 l& n5 Q$ P1 x8 a) }# C4 Ainter-provincial and international migration over the coming
2 i9 ^1 v6 A! F( M7 k! h& i$ i  Yyears, which, along with improvements in affordability,
( x2 t3 |0 i1 m+ ^! rwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
$ v1 @% j6 c% A1 Q/ S& l416-982-8063
( I! N2 _5 u' `5 \Pascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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