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
" N/ h! B: k: Q% d; {" L9 r; kunsustainable 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
$ q* Z( z/ {( ^' [, p3 _that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
5 [& N" S$ ^% s) s; G5 ZBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
% f$ M4 x( L( ]& tboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
9 z3 g2 a! t9 k/ t- V* |where homebuyers buy up too many houses and
7 Z5 `( c$ u& c. y  Mthat 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
“overbuilding” was mainly of the first type, where
$ }" R2 o% \5 s6 T) P4 u3 h' yhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
* D2 a+ U! M* w  D1 hWhile most markets won’t face U.S.-style overhangs,
1 |- y4 v! p  w8 Dthe construction of too many new homes over the boom
+ \" f3 B# J3 z- d2 J' a) |means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
% D9 n) a' h7 J2 Jfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
4 S  N- `& B) `) a) I' bis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
- O3 s$ K" o$ w1 g3 m2 _) jresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
( W4 x! G' g+ ^# |( zin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
! q  g- b7 e1 h; bwe first develop an empirical model, based on long-run
- w' z3 R) u1 @; w0 u9 C0 zfundamentals of house prices and housing starts in each
province. 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
regard housing prices and household formation as the drivers
of residential construction.
7 R5 L5 Q$ @$ O% p+ G. rTo examine the degree of overbuilding, we employ a
% M3 g; e( q; R% K$ F5 z“counter-factual,” asking what level of residential construction
" U" g+ o0 B4 d' Q6 |$ Kwould have occurred if housing had been priced
* v7 t' k' }  I' goptimally. We find that actual homebuilding exceeded this
0 F+ B# l* O0 g$ Tfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
* j# I  @* F, e+ {: ~2 N" u4 fmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
" h) p" q+ ^' J% H8 r6 x+ N8 Bwhere 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
0 _$ }* Z! E1 W3 E/ m/ i3 shas been relatively balanced but, while not plagued by structural
$ `7 x. W7 z: i5 K$ {. ^4 }weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
% E; G! F- p" @1 M8 ~6 B1 h: ?Montréal – but recent building has been relatively balanced,
7 j. J' Y9 z. y7 i9 Lgiven the province’s history of under-building and low ownership
" O7 m3 O' D0 irates. While Ontario homebuilding will reel from a
, ]' q& x2 G, lcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo 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
spike severely – particularly in Vancouver. However, while
+ P: K: L% k7 ^# b0 ^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,
' l: }+ z9 V4 L' M$ Owill alleviate some of the pressure from overbuilding.
7 X' A6 x$ i  Z! S. OOVERPRICED AND OVERBUILT: CANADIAN HOUSING
! z( i6 G& R9 H, EMARKET RETURNS TO FUNDAMENTALS
' t* @1 l" y/ y+ j. HGrant Bishop, Economist
1 H6 H& W6 `7 r" c: b* G% L, N9 n/ O416-982-8063
! ]# G0 X* e4 X8 x4 `9 T" RPascal Gauthier, Economist
416-944-5730

# I5 B- l! j  N2 \8 \8 W# xhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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