TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
1 M- f- P. w" Z4 Sfrom 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
, Z0 \6 c, T) ~. }three years.
+ t& b2 ?7 h' X( l! y% OBy “overpricing” we mean that prices detached from
+ i, I: D* O# Z+ j: \1 i  Stheir fundamentals, as witnessed by a steep erosion of
3 s1 }! }+ [% f( }, Z1 Baffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
3 q+ W( {$ X8 ~/ H% Fto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
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
“overbuilding” was mainly of the first type, where
5 Y4 b2 E8 b# F1 J5 qhomebuyers pushed homebuilding to an unsustainable pitch
7 U) c$ [* d, ithat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
' B% I, D# p7 {9 y6 w- _$ zmeans a deepened slump. This overbuilding will likely weigh
( C" Q# G/ a" x5 J- Non markets over the next few years. Even as Canada recovers
% L" ]/ V3 i% v* Ifrom the cyclical downturn, house price growth will
6 `( {/ [" ]/ Y( y- f. ^' R6 oremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
# U" v9 @8 a# K% ]) f3 W# y2 N* @: nis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
& {: y- U. T6 Q" s3 `1 e125,000 starts over 2009 with a trough around 115,000 units
1 G0 U. W. C* j" w. C! Kin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
* ]* X! Y7 k7 F9 N0 owe first develop an empirical model, based on long-run
. B2 x" b- t+ d3 m$ v2 Rfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
- l) |! C; S! y; dvalues since house prices should track incomes over the
* I6 Z. \; P: ?7 v9 j% plong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
1 Z# p* _( y3 {of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
+ y) t6 Y' l* x2 f7 [/ X4 n+ Ooptimally. We find that actual homebuilding exceeded this
5 M* `; t2 x  q. H: u* r! wfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
, ~( n2 X, Y/ K# ?0 _$ vRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
  c, j* c. n# R1 s1 M, t- p% bpopulation inflows. Saskatoon, Calgary and Edmonton are
$ K( K3 F* K! V( E9 Ralready witnessing surges in their unsold new homes at the
2 _- U+ ~' |3 S5 |  ]  Yvery time that the resale market has swung into strong
) o8 C! R+ b0 y  W9 abuyers’ 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
' S, O" P# G  L( ?: D! I6 ]! Rstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
. s3 l7 A9 j% |" |! pgiven the province’s history of under-building and low ownership
/ E6 ~# T. e0 n0 ?( d' Yrates. While Ontario homebuilding will reel from a
) E7 n* s4 {$ B2 ?# k) |9 Y" ocyclical downturn, the degree of structural weakness appears
! {$ r  z. c; w6 }* U* Xlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
& @. T6 U6 G) g  z1 Nconstruction mean that record numbers of condos will
+ X: `* M( @! c* [# [reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
4 E$ U" r/ ^' ?* j! @spike severely – particularly in Vancouver. However, while
. p: W+ i  t7 Q2 R& |1 E2 ]2 ?residential construction in B.C. will definitely droop, we
2 [% y) d4 M! l; g8 canticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
# X0 W, x* u+ t( e4 `4 u- [# Nwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
/ D6 H3 r  \4 Q, P3 r1 O) w0 XGrant Bishop, Economist
: l# a9 x! A6 M; U; l) J. h416-982-8063
8 ]0 ], V8 @. ^* v. h* oPascal Gauthier, Economist
# d) P& u* A/ C1 A: p416-944-5730

3 E& K9 a. \8 W1 v0 ~http://www.td.com/economics/special/gb0409_housing_exec.pdf

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