TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
; W" Z: g, V7 gfrom 2002 to 2008, unsustainable price increases drove
' E% x* U5 Q- J! j+ a5 ]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
overpricing compelled a level of residential construction
  c( d2 X* X; F6 M) k7 S/ ~2 f1 }that exceeded its fundamental-justified level by approximately
1 ?9 S! c  n) n12%, 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
6 K. O8 N; p/ ~( `4 e: kaffordability. The current unwinding of house prices reflects
: \* T$ _% r% |5 }- cboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
7 l. J  Y, P( g6 O/ J8 P- A/ e- U  `We consider “overbuilding” of two forms: “demanddriven”
0 D4 v  @( }6 l; i! d% z% Fwhere homebuyers buy up too many houses and
6 {  ?+ X0 E! V. N, z% k& ethat this demand cannot be sustained; and “supply-driven”
" N5 _# M5 H# g" L. Gwhere builders accumulate excessive inventories. Although
there 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
that 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
$ o3 r$ H0 d1 R( m7 Q# M6 Qmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
4 Z. m6 |: }; ?8 l, ~from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
0 T7 C+ m: T' H2 ^* V" Y( C) cdampened, owing to this structural weakness. Construction
is 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
5 F4 e- c/ m8 t5 `9 P8 ]) [in the fourth quarter.
' e  ]2 }  D0 g6 r* t, W* ^' i% u+ N9 XTo quantify the degree of overpricing and overbuilding,
we 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
4 w5 `* `4 S, e/ b: b  J+ ?values since house prices should track incomes over the
9 T2 O+ ^" D, @3 O! h, ?long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
/ j( ?. k) [  L$ c: @7 F, Eof residential construction.
9 s7 `) m; l, J& k& ETo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
; E  o6 q. a. M; swould have occurred if housing had been priced
7 [; S" A4 F) L8 ~+ aoptimally. We find that actual homebuilding exceeded this
' z2 [4 _/ F7 Yfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
+ b4 d% a4 k6 a# I" Smany 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
very time that the resale market has swung into strong
: j- v: ]4 o" w7 l  {, Z$ o* pbuyers’ territory. Homebuilding in the Atlantic provinces
  x6 k' M$ ?# _7 h" |/ b! `has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
9 N/ f, J1 |3 E& X9 Y  bQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
7 I: `. w" u4 g5 w+ f( zMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
5 ?3 ^$ @% p, W4 q+ Y; prates. While Ontario homebuilding will reel from a
4 F) x+ g# N" ?! v7 u/ ucyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
# i/ l7 D8 J1 econdo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
% a' H0 z' O8 n" r4 @( K) `8 g2 Wreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
  D8 G0 A5 _0 @8 f" y- V4 ^spike severely – particularly in Vancouver. However, while
4 b: f" r3 J- a( mresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
9 O/ u" d, F3 X; `5 Xwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
; O- w* b" g) n" }Pascal Gauthier, Economist
8 ~, \& g5 t7 L7 @416-944-5730

. I' r5 C' e+ I6 lhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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