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
unsustainable levels of building. Our view is that house
4 D  h+ p$ J9 [0 H/ gprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
2 p5 G! L( {! }) ]overpricing compelled a level of residential construction
6 i2 y. o7 t$ f( k: s& mthat exceeded its fundamental-justified level by approximately
$ n6 H. L$ `% Z; |' f12%, an excess that was exaggerated in the past
8 o' |, x+ u8 P- Qthree years.
By “overpricing” we mean that prices detached from
% }- J/ y) A% u5 A$ v, ^2 q3 T! @their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
' {5 }. b) B( G8 w/ R0 Bto fundamentally justified levels.
% I. p) n5 }0 {1 l. sWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
9 W* P- a1 h1 K5 c0 c9 [" Z! L" zthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
1 A3 F' u* F# l/ gthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
; [1 D( i$ b9 hhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
/ j0 d- |3 x. m- M  r& x6 A/ a) Rthe construction of too many new homes over the boom
! u: o* K3 D# Q5 @; x+ D( r1 Bmeans a deepened slump. This overbuilding will likely weigh
/ u8 ^& V& t4 D: o# s, von markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
5 U% `9 n/ X( p" n( _remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
8 F2 s* y+ ?2 q8 a4 v$ q$ O# K) _to persist over 2009 to 2011. We anticipate that nationwide
! W( a' K% j* }0 x1 dresidential construction will fall further to around
, E3 P' t: Z/ `1 T4 |125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
7 C, d! O8 ~6 t( ]5 [fundamentals of house prices and housing starts in each
* o; X( m! i" Jprovince. Affordability is the key concept behind home
2 a1 k1 s4 {- Mvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
  K0 c0 t- h& Fregard housing prices and household formation as the drivers
of residential construction.
1 X9 L! P. j1 e2 C+ q; b! `+ `$ vTo examine the degree of overbuilding, we employ a
) a2 o- ?- T" C“counter-factual,” asking what level of residential construction
* r, C  J) I% t9 O! z& jwould have occurred if housing had been priced
0 d! R' d0 @, ], u" M7 Qoptimally. 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.
" H4 J- }, r$ wRegionally, we see the greatest strains on the Prairies,
+ A: E5 _1 Q  c2 C* \2 gwhere housing demand will further contract under waning
6 {1 k4 d' t' j4 j- B" Xpopulation 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
' K6 I) ^, o6 F% H# k) rbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
9 `$ L0 w. G/ U2 uQuébec shows signs of strain – especially given the
' @6 e* I7 t6 j9 o  c3 Vstrange accumulation of unabsorbed multiples on l’Île de
4 c- Y$ z, j8 W; J& F& v& Y4 G$ JMontréal – 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
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
. P; `; v& q. ]. h1 M6 \( u( P& ihigh levels of apartment-style units presently under
% O8 {/ d) Y" q* m8 ^construction mean that record numbers of condos will
5 o/ w, Y3 Z3 C2 S7 T2 vreach completion during 2009. If absorption rates fall, as
5 ?- m7 n4 Y. X; ], T( R" Xcyclical factors would indicate, condo inventories could
% x& L# b# D& o; t- Jspike severely – particularly in Vancouver. However, while
5 u) `3 {1 ]2 H( fresidential construction in B.C. will definitely droop, we
( t4 p- {% H$ A4 ?9 h2 d/ a* Tanticipate that the West Coast will continue to benefit from
: W% D! O, Z) X5 F% \( m" binter-provincial and international migration over the coming
0 \$ B3 \+ S8 m. W6 {years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
. H1 ^  T  v. Z& d% L7 VOVERPRICED AND OVERBUILT: CANADIAN HOUSING
+ A0 q0 H+ y3 p# u. ^$ xMARKET RETURNS TO FUNDAMENTALS
# Q; d5 d9 y) {; S0 n0 ^7 R9 dGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730

/ D5 O2 w9 U# ?8 d  ohttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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