TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
8 N/ R2 w0 ]7 J: x- c4 ]from 2002 to 2008, unsustainable price increases drove
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
! n  U2 e1 X0 i! R8 w! Z( l" vthat exceeded its fundamental-justified level by approximately
$ R1 {1 x( ?- ^- D; D12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
3 R' t% g+ y& n/ mtheir fundamentals, as witnessed by a steep erosion of
2 W! Q- Z$ J7 a, x* taffordability. The current unwinding of house prices reflects
" @# H$ C2 y& Y4 L0 Uboth a cyclical downturn and a return of house prices
( r% l5 r# N+ _4 e) T) C: Uto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
6 s7 s$ I% b, I0 y4 r" Awhere homebuyers buy up too many houses and
9 c8 Q. t' \$ {( S, G6 j$ Hthat this demand cannot be sustained; and “supply-driven”
% C  q/ t3 E  N" S! X  Gwhere builders accumulate excessive inventories. Although
4 g' @8 g; s6 b1 ]0 O6 Lthere is evidence of both types, we contend that Canada’s
0 j' i. j" K- u7 a" ]4 J- v* y% z7 C“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
7 O( t% R! H6 @& a2 e* i5 v# xWhile most markets won’t face U.S.-style overhangs,
1 T4 d6 |- l* \! l" Qthe construction of too many new homes over the boom
, l. h4 G1 G1 \6 K7 Lmeans a deepened slump. This overbuilding will likely weigh
" L$ N8 F7 b# u3 y( K* G6 Eon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
- X  V" M4 l1 L" j6 u' R  Q" Bdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
2 }8 G: i* a$ ~4 F! r; L& cto persist over 2009 to 2011. We anticipate that nationwide
! n  p9 \3 o; x  Y; `8 j( @4 B/ nresidential 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,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
: l/ G# N) W9 G6 f2 G1 J% Tprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
. @+ V9 m: h* ^* D: Dregard housing prices and household formation as the drivers
3 C( l) R4 N# h3 \. ?- aof residential construction.
1 q* V$ z1 H$ [, @+ lTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
" Y7 \- q1 n; f5 M: b& m1 ]2 Bwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
- e- f* x  f0 x% cunits were being absorbed, homebuyers simply bought too
many 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
: H( h5 _2 J, E" _, ^6 avery time that the resale market has swung into strong
; D, Y5 t; Y- u9 Y( B: N' pbuyers’ territory. Homebuilding in the Atlantic provinces
' v* M& f" F0 W* o$ N: W" ghas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- B' x* n- c- e- kQuébec shows signs of strain – especially given the
- ~) S9 _+ R( sstrange 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
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
) i; H9 U2 \5 h* t' V8 Ucondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
1 {, I7 I3 A4 C/ |+ e: E) N/ |; Pspike severely – particularly in Vancouver. However, while
residential 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,
1 ]! ?- A# d, O2 L) P( ?+ A, N! u9 D' Qwill alleviate some of the pressure from overbuilding.
: M" N/ D% _2 x% ^# E) H- GOVERPRICED AND OVERBUILT: CANADIAN HOUSING
. _7 A' {  v& JMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
' V# ^) _  e$ g* L1 LPascal Gauthier, Economist
4 a( U- z. K- n- V3 o2 S416-944-5730
5 r5 C- k3 B$ `3 f$ v8 Y) w; l' |
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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