TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
) I0 d& v' r; L8 Q8 Vfrom 2002 to 2008, unsustainable price increases drove
( h% g0 i6 R- h% Q+ `& dunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
( n9 k: i: V+ R, G. afundamentals by approximately 9% nationwide. This
' B7 b& J# a% c* Q7 Yoverpricing compelled a level of residential construction
& |" A% \& w# K) r! {' k* hthat exceeded its fundamental-justified level by approximately
" \' Q& G1 W6 F% _; X( h- O$ C12%, an excess that was exaggerated in the past
three years.
! j' r- @% U5 [; U' J: _/ t- nBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
; R/ Q$ c$ l8 s0 f4 O4 Daffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
0 W+ u6 {% Z: g) e" Eto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
/ g; S- j7 t  bwhere builders accumulate excessive inventories. Although
. w" ?0 Y8 Y$ X& h5 I* ^there is evidence of both types, we contend that Canada’s
5 l# d  b1 j, U8 H5 O. ]“overbuilding” was mainly of the first type, where
, E, v1 O" U4 W+ ?2 Y% g9 o2 M" z* W$ zhomebuyers pushed homebuilding to an unsustainable pitch
/ M* H3 I" Y. v# Wthat is now being rapidly reined in.
7 f/ m* L( X2 P, f) T2 KWhile most markets won’t face U.S.-style overhangs,
5 R2 i, p& K( V) G6 L2 J4 j( ]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
; }" c0 O9 |1 E) z3 u/ p& n- p& Jfrom the cyclical downturn, house price growth will
9 w; A# T3 `7 L% hremain choppy and new residential construction will be
/ `0 d) _$ @& c; ]+ gdampened, owing to this structural weakness. Construction
7 l1 R4 D& G* s. `- eis now undershooting fundamentals and we expect this
6 k8 k9 i# b# c8 Pto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
+ P+ E, d" M) i7 B; p- Y- h& [9 n! Z125,000 starts over 2009 with a trough around 115,000 units
) u0 d* `4 C5 y4 p9 }* ^3 I& Nin the fourth quarter.
0 q! ~3 D% R) Q9 F7 T: f9 x7 {To quantify the degree of overpricing and overbuilding,
. [1 X. r# c5 o9 ]* O* n7 P! z9 {8 Nwe first develop an empirical model, based on long-run
1 n# L5 n( z0 c, P" n$ w# x3 Y  |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
long-run. Since homebuilders build to meet demand, we
+ r  ~( ]$ s% [: \7 {regard housing prices and household formation as the drivers
of residential construction.
# \" N. \5 I" S' ]" m# P1 VTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
* ?0 r0 V: s( [, g% Fwould have occurred if housing had been priced
+ E9 L. C7 m! `) A2 zoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
+ w* f/ K8 _$ E/ C/ |/ [many houses at prices that exceeded fundamentals.
Regionally, 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
: [* n% r3 M7 Lvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
$ C1 \2 @+ J- f$ x' z6 ]has been relatively balanced but, while not plagued by structural
. Y  x( `- A  v; [4 D1 W, V0 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
rates. While Ontario homebuilding will reel from a
+ z0 G; J4 w# W& u- P" \, @' Lcyclical 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
+ P3 x7 S( O% ?0 _; |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
, n+ w; R. T. B1 l3 {residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
' N5 `' }9 m' M- y' b. b% k' Kinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
/ D$ u# [" c' xwill alleviate some of the pressure from overbuilding.
  e; H1 z: {: ^5 zOVERPRICED AND OVERBUILT: CANADIAN HOUSING
4 u( H0 \- m: T+ M# RMARKET RETURNS TO FUNDAMENTALS
0 i1 g& F6 q3 {3 `# mGrant Bishop, Economist
0 |' b7 p" y  Z# g( l416-982-8063
( W7 V8 M/ `. BPascal Gauthier, Economist
416-944-5730

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

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