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
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
) `% V8 @9 r3 f+ C* O# C! v3 ~3 Pthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
/ H8 I; }+ C2 `4 ?. atheir fundamentals, as witnessed by a steep erosion of
1 j( Q' ?. J  y" r# F9 a4 q; Caffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
" L& n% g& w& L2 {0 M/ ?We consider “overbuilding” of two forms: “demanddriven”
: Y9 m- b5 p! ?- y: awhere homebuyers buy up too many houses and
( f# m, Y7 W* }6 Wthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
8 q/ k- l3 ]3 x& L1 t* P! N2 vthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
4 {* X$ Y/ B" V  X3 ihomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
0 {( _) D3 x3 H% g9 p3 Y, zWhile 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
1 F/ a; \- y7 Cfrom the cyclical downturn, house price growth will
3 {. Y# T- d, j/ ]3 x; Xremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
2 B+ O' I4 T9 N( k6 j* c125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
% a# T/ ]3 j% O  B1 I/ p) YTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
& `  x3 R/ P0 a6 o. o; jfundamentals 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
+ P- n; o$ n3 S- W9 _% }regard housing prices and household formation as the drivers
of residential construction.
9 n/ M: I9 e# Y6 X6 `3 T& STo examine the degree of overbuilding, we employ a
) K6 K7 {4 ~9 a“counter-factual,” asking what level of residential construction
4 s+ p) j/ ?3 r( A/ |: l4 vwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
+ L& v# Y) x8 P! E/ ~* }  f5 @1 Hfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
' }) X+ y8 z/ Q1 Q; v) T. {% Y( jmany houses at prices that exceeded fundamentals.
* `9 t+ f2 B1 z. mRegionally, we see the greatest strains on the Prairies,
/ U+ B& i% n" `$ d$ twhere housing demand will further contract under waning
( h# E- Z7 K5 \) {8 [, D. fpopulation inflows. Saskatoon, Calgary and Edmonton are
' g2 _- f6 p3 W( K7 yalready witnessing surges in their unsold new homes at the
: T; G) v8 o  t. i7 x! R1 h4 q. wvery time that the resale market has swung into strong
: a+ \7 `6 x0 m& Dbuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
) k9 Y7 v" m, j- `Québec shows signs of strain – especially given the
& r  o- G5 f& E$ o  Lstrange accumulation of unabsorbed multiples on l’Île de
! l+ y2 R2 K, Z! @Montréal – but recent building has been relatively balanced,
/ t( F& r& M7 H! |- O# egiven the province’s history of under-building and low ownership
8 Z3 i+ c" S+ n( y( Z- v' \' drates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
' T, ]% T0 Y. b* Bcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
' S1 K" n. L. m9 `6 Bconstruction 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
residential construction in B.C. will definitely droop, we
; w7 F1 m/ P. m* u0 M0 e( D3 n; wanticipate that the West Coast will continue to benefit from
/ ^7 G+ Y. U% y6 q5 `1 [% {( tinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
5 O- h+ H2 R4 D6 N) w# owill alleviate some of the pressure from overbuilding.
3 `- u: g0 E& ^9 NOVERPRICED AND OVERBUILT: CANADIAN HOUSING
5 e3 o& K% C7 @$ t6 bMARKET RETURNS TO FUNDAMENTALS
9 a5 h6 l$ K/ h5 DGrant Bishop, Economist
% w. q) u5 l9 G% B" b- g416-982-8063
. I8 {9 b* m) k6 q. WPascal Gauthier, Economist
416-944-5730
% b) s9 b+ P' Z6 V, J' x. q
" J; O/ y; g* P% [1 ]3 }/ |7 _http://www.td.com/economics/special/gb0409_housing_exec.pdf

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