TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
( h/ G* {6 T' w, r, nfrom 2002 to 2008, unsustainable price increases drove
  t% b4 I/ g# ~+ Nunsustainable levels of building. Our view is that house
5 T, ^, u5 H9 x& t* i- n* Jprices exceeded the value of housing that was justified by
* y& u  N9 z) L& N1 ~; k* K& Ffundamentals by approximately 9% nationwide. This
. ?: h0 x  r3 T& y7 v3 s) zoverpricing compelled a level of residential construction
8 _# e0 g4 s  dthat exceeded its fundamental-justified level by approximately
: [. y$ o8 E# d4 o- G6 N12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
, V" U0 J0 @3 m5 S" }: `their fundamentals, as witnessed by a steep erosion of
) p' {3 N7 I% @affordability. The current unwinding of house prices reflects
. ^4 T! o3 Q/ n; h: r& |2 n* @both a cyclical downturn and a return of house prices
; z' t! W+ s" W7 x$ q( K' l* q" zto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
# Z3 S' k! D9 |$ Hwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
) ?! a  b- |  R/ r4 othere is evidence of both types, we contend that Canada’s
/ _; Y! H; L& k# ]) L- L& o4 o! t“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
1 N$ y" s0 N# }9 c" Wthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
9 P0 T/ k- @. W# x4 Sthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
8 T) ~* C. t% L3 Xon markets over the next few years. Even as Canada recovers
9 ^7 K: a% j8 e4 |from the cyclical downturn, house price growth will
1 f; }7 o# A1 _+ S# mremain choppy and new residential construction will be
; s% N5 c" Y- Jdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
9 L' G" v* x- y  L# s3 j2 Jto persist over 2009 to 2011. We anticipate that nationwide
8 y/ ?- G+ s9 ^/ t# lresidential construction will fall further to around
5 \$ r) H7 R) K, _3 f# Y125,000 starts over 2009 with a trough around 115,000 units
. q; ]7 f- |% _  D) a, ^. _' _in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
' G# h& C3 G5 n' `1 n: Cwe first develop an empirical model, based on long-run
* d7 P$ M4 `' @0 O* ifundamentals 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
& K9 {" ^" c5 T+ ?9 j9 jregard housing prices and household formation as the drivers
5 f. ~" N0 X3 d6 n; {- y6 Yof residential construction.
To examine the degree of overbuilding, we employ a
* e9 x0 k' u8 f5 C+ {' N; U( `4 k* L3 d“counter-factual,” asking what level of residential construction
/ ^9 J+ r! |4 U  o  e' lwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
9 I" |4 P, S9 [' T& B- Nmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
- e2 u) M3 F! o" Hpopulation inflows. Saskatoon, Calgary and Edmonton are
! L% w; j3 K' falready witnessing surges in their unsold new homes at the
8 Z) ~) E4 c, Hvery 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
; ~0 n! a7 h1 h; L; RMontréal – but recent building has been relatively balanced,
8 v! S, v# N' j! g7 k) y" ~: b- O+ Vgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
' Q" m, C: Z, V0 a6 I3 m1 acyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
* {4 E4 z8 c, {* ]9 [: B. Tcondo market. Both in Toronto and Vancouver, historically
; P4 s( |* P/ ghigh levels of apartment-style units presently under
construction mean that record numbers of condos will
# A' T3 H9 j8 }0 d/ Z$ s1 ?reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
9 l  y" g! r0 p5 a& F* {residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
/ y9 f: O$ _6 ~7 o; S/ jinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
' ?5 N  Q, |9 L' Fwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
3 U) ?* _+ S2 U% q; CGrant Bishop, Economist
6 D0 ^' R- T0 O416-982-8063
# |9 ^( A4 l$ u$ d* w* Y* fPascal Gauthier, Economist
" @7 |- ~8 h& f0 b416-944-5730

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

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