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
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
$ N4 }* t1 l! R8 Lthree years.
By “overpricing” we mean that prices detached from
0 m9 I" v/ \+ V8 ]9 X- E) D$ V0 Ctheir fundamentals, as witnessed by a steep erosion of
7 \* o# y0 I! u; x4 ?7 l' X* uaffordability. The current unwinding of house prices reflects
5 @- Z* e! ^' Pboth a cyclical downturn and a return of house prices
$ h5 ^5 W/ f% X1 kto fundamentally justified levels.
+ y- H9 [6 ^  }! R) UWe consider “overbuilding” of two forms: “demanddriven”
% V/ |2 {2 u* ]+ }* Ewhere homebuyers buy up too many houses and
; n3 D/ r& q- g' ?8 Z& zthat this demand cannot be sustained; and “supply-driven”
/ I6 `; d' |# c7 f( Z% z9 Lwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
0 k; F. n! f6 g; E& P9 f2 r/ I7 e“overbuilding” was mainly of the first type, where
% r( e4 s$ ^8 k# m4 M5 q. v9 {homebuyers pushed homebuilding to an unsustainable pitch
+ m& l: ?( f. cthat is now being rapidly reined in.
4 x( T5 h( _) ]# RWhile 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
' r/ e9 B! E* s% I9 g0 J" _: xfrom the cyclical downturn, house price growth will
remain 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
" X6 K" V7 Z$ A) [+ N4 yresidential construction will fall further to around
, n8 a: N9 v* m) V4 W: \- `# q3 f125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
; W4 B- k4 i# A6 ^4 |3 {9 E+ x5 Y( WTo quantify the degree of overpricing and overbuilding,
" ?6 t, n. h8 Y# @% Kwe first develop an empirical model, based on long-run
7 j/ n2 Z6 N' z9 p  Efundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
* D( [. ^. ?0 ]0 l6 avalues since house prices should track incomes over the
1 F2 r# @$ ^) N/ t. Q- Jlong-run. Since homebuilders build to meet demand, we
6 @: b- n  F2 e9 v+ fregard housing prices and household formation as the drivers
of residential construction.
9 v/ F0 ^% @* a/ I: aTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
6 @7 D) ~% b. B; {- V1 Twould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
' u+ z2 q+ x5 H* Y, Cfundamental-justified level by about 12%. Although new
  {- o1 x: j  @0 M: Aunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
2 @, ?! P" V  E. k4 x: pRegionally, we see the greatest strains on the Prairies,
2 b& U) j# Q5 M# S' dwhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
7 S! |) S5 t% X0 zalready 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
has been relatively balanced but, while not plagued by structural
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
, y4 @7 x$ w8 f/ N) Y7 |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
! K/ G2 j( Z. V- C) O$ F* n. scyclical downturn, the degree of structural weakness appears
! s- S7 G1 h4 y- j% alimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
8 J. m  A5 L' g" j/ a& E% Vconstruction mean that record numbers of condos will
6 j( J' H& x/ N7 U/ Dreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
3 x+ i5 E1 l+ t3 M, J& ^spike severely – particularly in Vancouver. However, while
6 ^& s7 M# K+ p) r) Z! e) c  F0 L+ [residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
; n0 ^/ o0 y/ Q2 O+ ointer-provincial and international migration over the coming
years, which, along with improvements in affordability,
' U; D( {: R* \$ ~1 I) Fwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
2 q* X1 Y: i+ S) M3 aGrant Bishop, Economist
/ R6 H6 z/ F4 D. _7 U416-982-8063
9 Q/ a4 D; F8 a2 b; L& f8 o0 w) oPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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