TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
/ X. S1 y) ]9 s% S2 _  p+ W& Z: Bfrom 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
1 [' U6 q, j) A  T/ s9 kfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
' R1 |4 V1 E; V. b/ q$ P2 Bthree years.
: M* S# N  p# |6 m) f9 E4 uBy “overpricing” we mean that prices detached from
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
  M0 X. m; e6 {' _to fundamentally justified levels.
% L$ ?# F# C7 L* S+ I, ^We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
9 B# P6 C. n: M9 ]5 r2 [; S. sthat this demand cannot be sustained; and “supply-driven”
. G% `6 R) D3 ?- G2 e( xwhere builders accumulate excessive inventories. Although
there 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
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
4 Y8 ^4 ~/ ^! K! k7 Bthe construction of too many new homes over the boom
0 I6 h& J  w% Z( @" Emeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
8 I  E" s" [1 U" N  I: U$ h! o  mremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
( ?4 y4 \6 F0 T2 L" Cis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
+ t# a* m3 R& x) G& Mresidential construction will fall further to around
! C3 L4 X7 L2 H' u0 Y" z2 n" O8 r125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
5 Q9 J/ ^1 H9 T6 F; Z8 n# a  Dwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
/ K' e' \, U! o2 r% S: mvalues 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
of residential construction.
3 U, c! k5 g0 f7 a  u  _- l9 b5 i+ pTo 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
: u2 f" \; {" Ofundamental-justified level by about 12%. Although new
* c7 E( b' \; l* f# Q! |units were being absorbed, homebuyers simply bought too
  c% }1 ~- m! O' Ymany houses at prices that exceeded fundamentals.
( H- V# r9 c' Y+ Z  zRegionally, we see the greatest strains on the Prairies,
  N3 D& {3 k1 b8 P8 lwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
+ Z+ K0 {, s; d) d1 B* }+ H/ b$ Ralready witnessing surges in their unsold new homes at the
; ]) [- {: z) E2 r( [% r% k# t; _$ gvery time that the resale market has swung into strong
" N, {: `  b; u- {) x; W5 Kbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
/ R1 l6 x: i: q- k) G8 p' I) Xweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
) ?1 ^# e+ h! h9 sMontréal – but recent building has been relatively balanced,
. D' D# {5 @7 q  {9 D8 fgiven 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
3 ]3 R8 E/ e" U0 Tcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
6 f( }' o& h: s+ x' F* i, m" Tconstruction mean that record numbers of condos will
9 D& S4 L9 P% S6 G6 `, }reach completion during 2009. If absorption rates fall, as
, f" X, V# [$ E! w& E% S( N; w" fcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
/ I+ w" K. K! Z$ ?: U8 qanticipate that the West Coast will continue to benefit from
& }1 G$ j/ l$ k  |# ]) Winter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
+ r1 s/ `6 H4 Y0 oOVERPRICED AND OVERBUILT: CANADIAN HOUSING
* R+ f8 u6 h7 p% W$ ^MARKET RETURNS TO FUNDAMENTALS
/ t; L+ G. `4 C' \Grant Bishop, Economist
$ e% V/ j& u7 q5 P& X  y; H* O416-982-8063
0 }$ N( Z; L( [9 m( D" E% R- rPascal Gauthier, Economist
416-944-5730
: r# A8 M; |2 A9 N" i* d$ U
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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