TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
" ~7 |' f! P, {8 S5 u3 n! aunsustainable levels of building. Our view is that house
" ~9 L% j" Y4 [* d) W; k! sprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
3 L6 c+ B$ W7 e4 b% F* M! c: o$ zoverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
/ |, ?* y9 X3 P0 z8 `their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
" f$ Q8 h$ k7 U; s2 Xboth a cyclical downturn and a return of house prices
/ W! r+ O4 r) w4 q8 h+ C3 x. H+ ?to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
2 U% r, G9 g+ r% }' ]9 {that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
: E  r$ Z0 i8 g& [5 N& G“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
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
- h9 q  [$ l' J+ P9 ^from the cyclical downturn, house price growth will
5 t9 Z1 Y. \. w# [% P, Y6 n, C8 L0 G- Aremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
* a5 B$ \: `3 a6 {8 Xto persist over 2009 to 2011. We anticipate that nationwide
$ G: N# x$ ~# M/ P% h2 v+ presidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
8 v4 O* G  U8 M* V* p2 [in the fourth quarter.
To 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
, d8 }; A7 n5 r# nvalues since house prices should track incomes over the
4 [! ]+ a# J' {- q( Q% Elong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
4 k8 k/ a. z/ E+ A% n9 kof residential construction.
$ A6 u7 p3 O9 fTo examine the degree of overbuilding, we employ a
& G5 a* K4 J( }+ B“counter-factual,” asking what level of residential construction
! K" I5 C9 L; s  S  S6 H6 E0 Q$ _would have occurred if housing had been priced
* b9 Z, o9 x$ W, }. |  H( [, Aoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
8 d0 L/ c& C. E* p1 xunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
9 x. o1 \% _/ ]8 ?Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
, `# C3 ?4 i2 ?7 p. P# g& Kpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
. n* W0 T7 u& _% c0 |! S4 |very time that the resale market has swung into strong
" W- v/ A0 T3 e0 b: \' Mbuyers’ territory. Homebuilding in the Atlantic provinces
5 e* ?1 F8 ?1 s' ~: i; Fhas been relatively balanced but, while not plagued by structural
+ U9 V* f6 Y8 T% f! rweakness, 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
4 a: |; V: _( ?4 p- ]! C; S9 `rates. While Ontario homebuilding will reel from a
- M7 x: I! Q. m5 r( w' qcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
6 k! G6 S0 R+ [3 p  t1 `+ Ghigh levels of apartment-style units presently under
$ @) t  M. w6 s2 Kconstruction 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
- ?1 c" \- T: r7 |6 l2 \residential construction in B.C. will definitely droop, we
4 u, E% O* j6 k9 nanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
; A& p# C3 H; i; V/ z* K# e/ Cyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
0 g  {. f% L5 @2 x$ M6 aOVERPRICED AND OVERBUILT: CANADIAN HOUSING
2 `- p3 Z. G4 Z$ y* P( dMARKET RETURNS TO FUNDAMENTALS
3 i( I! F6 f  q* ~! |& b& P- R. r4 RGrant Bishop, Economist
. m8 y* }: l( d/ e/ v& d416-982-8063
Pascal Gauthier, Economist
416-944-5730
- g& h% @1 H, w; {% Q+ T  n
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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