TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
8 Y  D9 k( v' g% k- m( V3 N1 ?8 Xfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
+ l- c$ X  ?6 @9 T* d6 q3 `( \; z3 Fprices 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
* c  P- I* ~# x& O+ x2 v8 E12%, 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
, ~& o/ X% B* i% Laffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
0 D- x8 v" W0 Q5 jto fundamentally justified levels.
7 p* v! \* q: @/ n) o: J4 WWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
/ |$ s7 A3 r2 F" \0 Z2 _where builders accumulate excessive inventories. Although
9 L$ s& Y' v7 \$ X4 u: z8 Xthere 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
9 r* h4 u1 q7 u( j- |' M! w3 xthat is now being rapidly reined in.
" G. ]6 S7 X6 OWhile most markets won’t face U.S.-style overhangs,
- _7 k* s' ]$ r1 u+ Fthe 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
from the cyclical downturn, house price growth will
: L+ H& s- \. [7 l# Q, d2 C" cremain choppy and new residential construction will be
! t9 O. G' b3 @1 Sdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
8 i* ^4 E' P( uto persist over 2009 to 2011. We anticipate that nationwide
$ ]3 C4 L; G: C! }residential construction will fall further to around
9 \2 h5 ~! }( `/ Q# n" n125,000 starts over 2009 with a trough around 115,000 units
0 p; |$ }% G" {in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
& d& ?3 x$ A1 J% n# ~, ^4 fwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
7 c4 n/ z" q: T1 K! \province. Affordability is the key concept behind home
6 r& g: ~5 y! I! X4 Ovalues since house prices should track incomes over the
4 E( s4 L- N/ F( jlong-run. Since homebuilders build to meet demand, we
+ G& [' O4 b, N2 Y; r& v/ y# mregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
0 i# N+ e8 a- W+ h- ~; x7 o: L“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
/ s9 r) I6 a& Z# }, U9 U! q" y1 qRegionally, we see the greatest strains on the Prairies,
0 E) q* \( _3 [4 J: d$ S/ c4 Ewhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
9 h% v: f6 h' q3 }; O0 B/ {7 malready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
  M7 w/ H! b/ I3 g3 X! T9 J8 y  Sbuyers’ territory. Homebuilding in the Atlantic provinces
: m# Y& C. a1 ~has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
8 @0 ]8 ~% r& W* D. o! mQuébec shows signs of strain – especially given the
8 L  H) `3 C5 f$ J: v' ~0 ]( sstrange 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
$ B/ t5 W5 D2 Wcyclical downturn, the degree of structural weakness appears
: i5 w- f3 L( N9 _3 v+ ?5 P% Wlimited – with the important exception of the Toronto
% Z+ w7 g9 ~! m7 g5 gcondo market. Both in Toronto and Vancouver, historically
. Y- a, a- g' N0 G- ohigh 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
  W- W. D/ _' J& W( h# ^spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
/ d9 B  @  A; k' w+ s# @3 _& Danticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
( i; K0 q: @2 J5 ~will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
! ]* _) g' T! R, K' x3 g2 [416-982-8063
, v; L* e1 o+ Q8 u. k" E+ K* E& `Pascal Gauthier, Economist
, M! K) @3 I; g416-944-5730

# s' Z6 j0 \7 I4 [. `+ phttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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