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
' h) H7 F3 {, u& E. W/ p2 C. _5 Yunsustainable levels of building. Our view is that house
' k& o& |. o6 d( ~4 c1 ~6 qprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
6 q! J! }# `7 }8 y9 f# {overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
2 }7 P9 y3 h" b  g12%, an excess that was exaggerated in the past
! P4 Z3 @. h4 S) R; Tthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
5 t: s* X2 D' f' ^affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
+ r8 X4 |- z6 \# b- [We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
. j$ W. F2 O7 S/ v0 A! C$ ~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
9 E6 A! C8 z6 h$ Q" f3 X“overbuilding” was mainly of the first type, where
+ {: @! H" v! U) a% I- M9 N( yhomebuyers pushed homebuilding to an unsustainable pitch
" m/ o- d! {* G1 i. r+ _" ethat is now being rapidly reined in.
2 }# i) U4 e1 `4 Q, PWhile 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
' ^7 |( w8 K7 V, X) V: Rfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
2 m& G, Y4 C  r8 ]7 sdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
! Q0 w7 B. I  f2 l! ]to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
( \# ^, ]# V& k, v125,000 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
  S& h' G% A) `7 L! k) M4 @' ~province. Affordability is the key concept behind home
; _0 Z- J, \/ O0 T6 x* rvalues since house prices should track incomes over the
) y* u6 \9 a- h* [0 x9 hlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
3 |; M8 H% `6 bof residential construction.
To examine the degree of overbuilding, we employ a
6 g+ D  g2 x1 e' s" c7 V. k9 l“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
  W3 x8 A/ w7 V% a# f; G: D5 afundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
# i8 z+ X) p( e& Z' ~  t) l2 `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
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
+ |3 v) O+ x" p2 a" y* c* Qhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
- s' V4 O9 B% K8 i* a0 P" I/ nQuébec shows signs of strain – especially given the
( P( l- N; y/ i& Z3 ~strange accumulation of unabsorbed multiples on l’Île de
8 [; w! V) u+ R6 j+ D3 r9 q9 iMontréal – but recent building has been relatively balanced,
3 d# I+ V7 D# |: E5 ]given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
, ]: _9 B$ o5 Y7 `2 F& w& dcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
/ ~, }) S% d; A$ s9 W8 i3 Vcondo market. Both in Toronto and Vancouver, historically
8 q" H6 T+ j2 t/ vhigh 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
spike severely – particularly in Vancouver. However, while
4 k" A( R7 A3 a* j  dresidential construction in B.C. will definitely droop, we
  ]2 B4 X/ I$ Q0 b/ Zanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
# W* L' T7 I# M5 b. o7 n! \Grant Bishop, Economist
" f8 i: W: R8 ~& ]+ ~2 Z416-982-8063
Pascal Gauthier, Economist
) U, C7 i4 P; t5 @/ h$ e416-944-5730
1 A3 G# }. C4 d( s- F7 m. V9 M) ~
- {0 j5 O6 ~  T  O$ B7 rhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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