TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
0 A# f2 E/ w1 D& m+ kfrom 2002 to 2008, unsustainable price increases drove
2 ]5 c* ~+ ^3 K8 M- z7 {/ iunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
8 l, q: K; M5 @( i; F# M! kfundamentals by approximately 9% nationwide. This
6 }5 t" O/ J- q% r* T7 T0 ooverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
/ D& @5 ?$ }  g8 X1 ]: ^4 t- Vthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
$ Q& Q" e1 F& i) p0 \" w. G/ Vto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
: r. S/ Q* W$ K( Q& gwhere homebuyers buy up too many houses and
. S: `/ \" l, n/ Q( nthat this demand cannot be sustained; and “supply-driven”
) K0 E9 s9 b. j: s8 P; ]1 j6 _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
# Y1 N2 y( D4 Z& C& i! c! M  Zhomebuyers pushed homebuilding to an unsustainable pitch
that 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
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
' l% J  V9 [6 z8 [from 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
8 B# I! T& P$ G0 [1 ^$ P( l4 fto persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
0 N3 e+ u- {- W3 L- [: E125,000 starts over 2009 with a trough around 115,000 units
3 ?$ E5 I& ~2 H+ e- ?  Oin the fourth quarter.
* }2 |0 C& Q. V* h: Y) {% @To quantify the degree of overpricing and overbuilding,
3 N* ~' W1 L/ p* q2 fwe first develop an empirical model, based on long-run
$ w) L, K; U! Q8 g" T( ^! ffundamentals of house prices and housing starts in each
% M. V7 }" w# e: ~province. Affordability is the key concept behind home
4 K2 T, K4 l+ D& f9 P, @) Xvalues 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
; O2 q$ t3 k4 d! z' U$ T& t/ o$ C7 zof residential construction.
; K2 X6 k, f: v% u/ N; Y$ I, ]) ], dTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
0 D, e3 K4 e3 p# ^3 |" qoptimally. We find that actual homebuilding exceeded this
8 S  o3 V2 \- U( r" H3 k  Vfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
, J; i$ U7 i/ ~& bRegionally, we see the greatest strains on the Prairies,
9 ~( p/ w% k. G2 v5 N' q" lwhere housing demand will further contract under waning
: U  |. [8 G: T# opopulation inflows. Saskatoon, Calgary and Edmonton are
6 U; v$ x) P6 S! }/ N5 {5 ^already witnessing surges in their unsold new homes at the
9 A. t. c! Q) t+ f+ z/ K2 Every 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.
" d' ^# W2 w8 y% r+ jQuébec shows signs of strain – especially given the
5 E. f0 f$ i% zstrange accumulation of unabsorbed multiples on l’Île de
- u, [: H& X* w0 r$ v. jMontréal – 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
$ y5 J. T7 i. Q9 k8 \cyclical downturn, the degree of structural weakness appears
. s$ F4 O  D0 mlimited – with the important exception of the Toronto
0 P5 {& l7 N& d$ {6 l8 i2 ~condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
. {' ?2 S) t4 E& i1 N: ]7 y9 wreach completion during 2009. If absorption rates fall, as
- C0 ]5 H. _" \1 F% Icyclical factors would indicate, condo inventories could
% D: k( l5 J2 C  x: Jspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
9 Q6 H; r" s9 ]; _/ k, v& tanticipate that the West Coast will continue to benefit from
# m9 U# p1 Z$ k5 ^inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
2 j) d( Y9 u8 z3 F$ swill alleviate some of the pressure from overbuilding.
3 D2 M$ T5 g' w1 d9 m  wOVERPRICED AND OVERBUILT: CANADIAN HOUSING
7 v6 e* f3 {' J' o) @; ^. [4 N- j; lMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
" l: w, A. @& Q416-982-8063
$ B- t9 \: l2 ?2 @Pascal Gauthier, Economist
2 ?1 c( W6 e$ L+ u- q3 N416-944-5730
4 H$ C. i+ R/ R. w3 P2 P
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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