TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
8 g0 h* S: [$ Q( r# {% k2 s) Lfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
. J8 f. B7 J  h5 h4 \% x. Xoverpricing compelled a level of residential construction
% g' k' {8 R+ @2 nthat exceeded its fundamental-justified level by approximately
) @: `9 B5 E# U1 @0 O8 j: G12%, an excess that was exaggerated in the past
three years.
) ?8 ?* L+ ^2 w/ D# S* \1 V& dBy “overpricing” we mean that prices detached from
, r  z& B- b, ~6 }9 Ytheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
5 `, I* C4 j0 J) c! hboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
6 _: u1 I( c  w; V, K3 IWe 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
9 p! Y/ S* e; v, d$ ~6 ?/ P& z% xthere is evidence of both types, we contend that Canada’s
8 O( Q# [( B' J$ A9 T+ k3 r8 d“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
* i: ?2 e9 g; a% {) S- H) U) z% |6 S/ jthat 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
7 b4 ~# f  w1 G5 r2 [% p# c" \: Wmeans a deepened slump. This overbuilding will likely weigh
( }$ i6 \0 F) O" O9 x# `; ion markets over the next few years. Even as Canada recovers
5 G! H3 t8 W0 ~. L- X/ p& _from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
1 i0 O) c' Q( y7 ]. |dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
: U3 a6 ~5 d/ y; L2 X2 m  k) R3 yresidential construction will fall further to around
; z4 P9 A5 f) P& b3 ?125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
$ a- O3 J; e+ Lwe first develop an empirical model, based on long-run
& ?( K* ?' P. S& n: {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
' _& a; ~% G! t& Q# g' ~9 Nlong-run. Since homebuilders build to meet demand, we
' t, H; S  {7 r1 y2 S2 ~+ uregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
" N8 O( L/ H; y  I; V$ ?* j* f7 J“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
. c, e; T6 Q$ y) A  n* C  roptimally. We find that actual homebuilding exceeded this
1 X2 Q8 v7 P$ [$ H) |% C7 Q% U! D1 Kfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
2 z6 r; f+ _# i5 q, N, X+ Vmany houses at prices that exceeded fundamentals.
. G' ^2 d0 F4 W6 ]. e/ d" nRegionally, we see the greatest strains on the Prairies,
. c& C5 B- q1 }3 ~$ G* \7 @2 |where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
* Y) o! a. k5 T9 }* q9 |already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
! ^1 _0 v, _8 B4 u6 fbuyers’ territory. Homebuilding in the Atlantic provinces
1 H' x( n  F$ T. H/ z: Nhas been relatively balanced but, while not plagued by structural
  B5 I. C3 D0 q3 q0 g4 K+ wweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange 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
  c! i  y; F) U) |" Z# F6 j' O5 Grates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
" e+ y9 |& w3 h, w$ f( V7 Slimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
. c& N6 N3 U6 ~4 {* lhigh levels of apartment-style units presently under
" N; V' f- F1 [) Fconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
* ], I. _9 s( [! U9 O! G. d& D4 Fcyclical 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
9 t, S6 s5 G- z9 q: Ninter-provincial and international migration over the coming
  c- x: d$ @% T3 \& _6 a. P- h/ dyears, which, along with improvements in affordability,
' J( w! W' d, y2 [( O% I' u8 nwill alleviate some of the pressure from overbuilding.
9 s: s% f4 H4 C# R/ \) f9 d: u& G0 KOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
, \' ]& K0 x" A% A" O8 SGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
1 c9 c6 _5 q# m2 _  A0 b. M416-944-5730

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

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