TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
2 Y4 U% E* {9 j* f( l4 t( z) zfrom 2002 to 2008, unsustainable price increases drove
: a' [/ b: d0 q, C$ `( O; G. junsustainable levels of building. Our view is that house
- L6 a  |& i5 l0 Bprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
7 r: H& S, J. N) o+ Koverpricing compelled a level of residential construction
' R! N( g3 i& s2 l4 [2 s1 E4 Jthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
. v, {! t. U/ [' m3 k- N8 }6 B, h) @three years.
By “overpricing” we mean that prices detached from
' R7 {; n5 F5 g& mtheir fundamentals, as witnessed by a steep erosion of
+ j' C( k# L; q3 W9 w9 M; v: X1 Baffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
% `- N6 Z9 R0 O5 ?to fundamentally justified levels.
) M' {9 H; l# q; H7 J7 K# QWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
. C7 `3 k3 K$ r" }* }: Zthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
6 |  x& \$ n7 _" h, bthere 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
. F7 e* t& M, Z5 B2 T$ Fthat is now being rapidly reined in.
' ]  f8 T9 c* h! |- W. GWhile most markets won’t face U.S.-style overhangs,
/ c6 y0 d  @7 w9 i. {% Y$ uthe construction of too many new homes over the boom
, h7 z% d( P" x, p& vmeans a deepened slump. This overbuilding will likely weigh
9 _8 \, u' R+ P9 S6 |5 j5 j! Xon markets over the next few years. Even as Canada recovers
# T$ Q, M0 Q+ q! |6 \) Yfrom the cyclical downturn, house price growth will
% J9 Q* @+ R! w: T' D0 Sremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
" G% U# ]4 z5 u- _5 |- U+ yis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
1 ~9 b6 W5 u, d% `* b0 Hresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
9 P0 Y5 {; v7 q; p' p4 H( P1 r& |6 mwe first develop an empirical model, based on long-run
' Q# k, e7 x/ }& ^$ lfundamentals of house prices and housing starts in each
6 R8 y1 N* P, M7 D. W/ kprovince. Affordability is the key concept behind home
& E; ~7 {7 D  J- X0 Evalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
8 ]) L' e# |$ D1 k9 [) R: hof residential construction.
1 V! E1 L( P5 f( rTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
' B  ]) ?, u  p7 j) N9 v* V) Vwould have occurred if housing had been priced
0 x% e3 c' [: Yoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
) [8 v1 @" k  h3 Y& ]" h$ X  ~many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
3 B. Q4 I6 n; awhere housing demand will further contract under waning
' G' `% \: D4 _; L% c- gpopulation inflows. Saskatoon, Calgary and Edmonton are
1 |% e7 p( z% B* E4 dalready witnessing surges in their unsold new homes at the
) \3 N/ n: L7 b; Zvery time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
/ @' N, N) Y! u- Mweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
8 ]& L+ Q1 c. B3 F  qstrange accumulation of unabsorbed multiples on l’Île de
5 o/ a: Z; H, h& PMontréal – but recent building has been relatively balanced,
5 B- ?9 e$ R& \7 @$ D- Ngiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
7 J+ g% N, k" A  {cyclical downturn, the degree of structural weakness appears
! ^( a+ i: K2 C7 z% }0 t5 ]limited – with the important exception of the Toronto
2 s% i( |& X$ W. }condo market. Both in Toronto and Vancouver, historically
0 G0 i' o+ |* z7 Zhigh levels of apartment-style units presently under
0 c7 ]. G, A: m# H, t  wconstruction mean that record numbers of condos will
6 [, ~, @, G6 U$ g# ]  `& t% T. W# }reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
: ?. Q8 F+ J- I0 V2 }spike severely – particularly in Vancouver. However, while
: T7 w- Y! {; m7 d- `1 v" y5 A! Tresidential 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
' q. P1 ?5 L; W' `* _9 [7 W' Jyears, which, along with improvements in affordability,
+ H: @: ?) k) rwill alleviate some of the pressure from overbuilding.
% k; M. `+ {4 \3 KOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! u  j: U4 I$ t' k/ s0 r, _& v7 q4 z9 sMARKET RETURNS TO FUNDAMENTALS
; p# z' s' a+ Q" @  EGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
, }8 M. T$ q0 W6 B416-944-5730
& w8 S- V2 C9 j* B$ E  K
5 i4 [  p3 H! q) [4 Z7 Phttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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