TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
0 R5 _& E3 C/ X" B9 ?, F# c( Yfrom 2002 to 2008, unsustainable price increases drove
+ ~" v+ w" z" |; r0 W. Zunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
4 A+ m8 h8 d& [9 q1 koverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
. T% Z! N  p9 g* K2 Vthree years.
By “overpricing” we mean that prices detached from
& C4 q4 T% i: Y' U1 t3 \their fundamentals, as witnessed by a steep erosion of
; w4 O9 z. D- o9 L' H% Vaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
# Q1 I1 k8 ^/ X. b- bto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
$ R5 ^% w# C  M* L# ]9 m( V3 o! |where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
3 H. {2 n& y4 [where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
  Q% l+ A% t2 `7 @" X! Q" T“overbuilding” was mainly of the first type, where
& x2 s1 p  Y. F7 ~+ ?- u! t$ ]homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 C$ p8 S* D" U  H* b8 eWhile most markets won’t face U.S.-style overhangs,
! V& c3 Z+ y' e! m9 pthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
" a9 X5 u! d0 U1 e2 a9 w2 Hon markets over the next few years. Even as Canada recovers
+ f! s0 W7 }: l3 A7 K6 Gfrom the cyclical downturn, house price growth will
) [: x8 l3 T0 p$ ?remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
' v2 @" B- Y) y2 dto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
! O6 ]% @0 k7 B' G125,000 starts over 2009 with a trough around 115,000 units
# {6 I, v( k+ b$ S: v/ f' _in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
$ U! q) `$ I$ i2 B3 H& ?fundamentals of house prices and housing starts in each
/ Z5 b8 e  ~9 H. Q% e7 eprovince. Affordability is the key concept behind home
! s0 a$ Q; H0 M, s4 l9 V+ C3 u4 Gvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
( Q  T& E* d# R4 ]( Bregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. 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.
, S# m" _- i! a! d% \Regionally, we see the greatest strains on the Prairies,
$ y( u5 g: C% ~0 swhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
% R7 p& q# S4 ~already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
% Q3 X- R) y* E* A3 Mbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
( W+ k/ e# f* F2 u3 h  nweakness, will be singed by the downturn nonetheless.
) ~, H2 h' j$ m9 ^+ f2 ]* n; R+ l4 dQuébec shows signs of strain – especially given the
. B2 n5 T7 {4 I9 Tstrange 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
: t# t' j4 K1 \' h4 a7 q; t' rrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
' N- H0 k! d! ^condo market. Both in Toronto and Vancouver, historically
, R9 n: P) d. Z1 i$ S) Ahigh levels of apartment-style units presently under
construction mean that record numbers of condos will
/ m$ ?+ {9 g9 J% A* ireach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
% p% q3 G' ]7 z. P7 Q, a5 H9 U( Xspike severely – particularly in Vancouver. However, while
* P8 X, c% T8 H* M$ N! J* xresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
+ f; B# b7 _# k' i* r) Einter-provincial and international migration over the coming
years, which, along with improvements in affordability,
  ^1 ^& B! @/ z* i5 F" gwill alleviate some of the pressure from overbuilding.
( T' W: R6 [  H8 \- ]OVERPRICED AND OVERBUILT: CANADIAN HOUSING
; M+ U$ D% H4 H% r7 t* k. k0 X8 ~MARKET RETURNS TO FUNDAMENTALS
' j! c' r; }6 E7 A, kGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
416-944-5730
) S4 [- L# J4 r3 f7 e% v
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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