TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
& F8 Y4 T+ d' u: Z. P& L" pfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
& A+ A/ B' w1 d& j3 Hprices exceeded the value of housing that was justified by
+ T& V+ Z9 M2 d. E3 j  F( afundamentals by approximately 9% nationwide. This
- f" @1 m3 b3 Z* Q% k0 yoverpricing compelled a level of residential construction
3 F; X# R% t7 {$ [8 D. r9 k# l0 `that exceeded its fundamental-justified level by approximately
4 w4 h3 E. O& @& D1 m12%, an excess that was exaggerated in the past
+ d3 z6 f; p2 O+ e/ X$ b3 t( H" t* fthree years.
8 ]( ?3 {) d0 z6 W# cBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
9 ^) Q* U7 o. V0 M0 jaffordability. The current unwinding of house prices reflects
  l. U; U/ M$ I6 y+ H7 W% D+ _both a cyclical downturn and a return of house prices
" e5 i# j% b, g( _1 [. lto fundamentally justified levels.
; e5 }6 o9 ?2 R" N5 w  E4 ^9 V0 zWe consider “overbuilding” of two forms: “demanddriven”
( u9 \0 E# u0 W' owhere homebuyers buy up too many houses and
4 S7 Q+ Z+ O) [  w( R: @/ Zthat this demand cannot be sustained; and “supply-driven”
: _4 x0 h# V8 q! ?/ q9 qwhere builders accumulate excessive inventories. Although
- R: [' v; s% O& {there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
9 l* P0 o6 S2 e) _' shomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
' b( s: O2 i) {9 K$ P$ P' i' J2 jWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
: T+ s5 I8 n' }! l" smeans a deepened slump. This overbuilding will likely weigh
4 T: L" j% f( }, s, p4 W8 |6 ?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
2 o$ t2 V* e. p4 D8 ]2 ddampened, owing to this structural weakness. Construction
, i* n2 X0 O0 C' S8 tis now undershooting fundamentals and we expect this
to 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
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
9 A, Y3 k/ t+ m* b. rwe 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
% {+ N: U: `( Y% flong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
; ]. [) `; {" @of residential construction.
, l5 O  J8 x* z. f# pTo examine the degree of overbuilding, we employ a
6 v6 J8 _. }5 ]+ @“counter-factual,” asking what level of residential construction
4 U$ l0 \& M& H" I" kwould have occurred if housing had been priced
" a9 f( ]* o, {% w: U4 f( h4 koptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
2 b$ E2 ], V" M4 aunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
: b% }9 ~: }1 }% K5 FRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population 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
1 B/ G4 M. {+ a3 `7 r4 e2 @$ I8 chas been relatively balanced but, while not plagued by structural
  @8 ?/ a- b1 _& o. zweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
0 U5 ?, }: c$ a0 U7 Zstrange accumulation of unabsorbed multiples on l’Île de
, W' K9 i/ i/ i1 ^8 M1 @% ]Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
; Q& P) G7 [9 J- grates. While Ontario homebuilding will reel from a
' [2 B% H" a) A; dcyclical downturn, the degree of structural weakness appears
; N3 K& Y4 `( h: zlimited – with the important exception of the Toronto
% O% d7 [. U$ w+ econdo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
' h' O7 c$ D: d1 `0 dconstruction mean that record numbers of condos will
& S) _6 E; r; _$ Q9 Ureach completion during 2009. If absorption rates fall, as
: U( n7 c0 \' y6 c  \cyclical factors would indicate, condo inventories could
: \+ M5 }/ J9 espike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
/ m, m, R( d5 a. ]6 q, K) \0 [anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
# S* p# y* t- C  o0 Y+ vyears, which, along with improvements in affordability,
3 J9 ~6 _( _3 Z7 ?' qwill alleviate some of the pressure from overbuilding.
# h8 w: V3 [6 g& j  E7 ?3 M  z* kOVERPRICED AND OVERBUILT: CANADIAN HOUSING
* a$ u- G1 K6 m& n) G7 mMARKET RETURNS TO FUNDAMENTALS
( B' G" u( P0 v4 X9 SGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730

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

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