TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
; z; u- n9 W- c0 nfrom 2002 to 2008, unsustainable price increases drove
1 f  ?6 }% K% e/ Aunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
, W3 n( T! b0 [( ~: _fundamentals by approximately 9% nationwide. This
: f: F* I) ?: _0 ?& ~overpricing compelled a level of residential construction
# j7 I) D' }: }9 B2 D# u2 r- `  y  xthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
& p' C; j7 h1 jthree years.
By “overpricing” we mean that prices detached from
" ^  O8 \7 w# m/ ltheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
& h) K0 F' V% f1 k  a8 ?both a cyclical downturn and a return of house prices
7 m2 J7 w3 z1 C) Q' Fto fundamentally justified levels.
% Q, r  A" V/ Y: X& aWe consider “overbuilding” of two forms: “demanddriven”
. {' N* _$ ^8 G( g1 T: i" K/ @where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
  Z2 i* j$ A# s) i) awhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
! Y. t6 Y2 L4 W. Q; ~homebuyers pushed homebuilding to an unsustainable pitch
& _3 h2 K  g  a4 i- lthat is now being rapidly reined in.
2 A4 Z% i1 E- P% p$ D, U. n% ]" }2 IWhile most markets won’t face U.S.-style overhangs,
5 Y/ K  }! o- K- G# |. g/ F  Pthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
7 c1 x) r; T* Kon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
- I( w$ I8 I! h2 ^$ e+ H+ hremain choppy and new residential construction will be
! N( o0 K1 _) ~5 m6 ydampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
& w. ]" |0 @  l. H4 T+ e/ l7 ]: U1 fresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
- \$ \3 h; i4 O2 r) F  lprovince. Affordability is the key concept behind home
$ I5 y6 R0 ]; O& Vvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
# k6 Z& b4 ?6 `" N  p" I  ^; aregard housing prices and household formation as the drivers
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
9 J9 |6 k5 O8 P. [0 `optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
. h9 t$ V! e* y" J' Wunits were being absorbed, homebuyers simply bought too
0 G8 w! k1 ]% t1 t5 P1 b8 I1 x. s! R) v5 Pmany houses at prices that exceeded fundamentals.
4 B  E% c( U- U. ]9 H5 VRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
% g+ R  ]8 v5 `0 _4 malready witnessing surges in their unsold new homes at the
; s& T1 e) c% R5 G6 B9 Bvery time that the resale market has swung into strong
2 u% k! k. H' H7 t! Vbuyers’ territory. Homebuilding in the Atlantic provinces
, d+ |( s  k  n7 H% Ghas been relatively balanced but, while not plagued by structural
/ T6 u# I( b% n! b+ M8 v/ bweakness, will be singed by the downturn nonetheless.
( a! b8 v8 q# g- P* O4 ]; Y0 ^Québec shows signs of strain – especially given the
2 s! j8 K1 A" P& C% ]" L% X. Q( Sstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
& b- Y; y) s; |3 L7 Fgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
- X- H7 t  j2 E9 r4 d) z1 ~8 Klimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
8 {/ U3 J0 V$ j5 b' Y) a- _; L" e0 ~high levels of apartment-style units presently under
construction 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
9 [; C# ~8 t3 _2 a! s6 ^% ]: sresidential construction in B.C. will definitely droop, we
5 t  N, r+ R+ P: eanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
2 z$ Z$ R% g5 u2 ?$ C5 xwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
% ~$ K' M1 r' ~: cMARKET RETURNS TO FUNDAMENTALS
7 d9 d+ n) P$ aGrant Bishop, Economist
- u; p+ ?/ r$ B9 {0 x1 o3 ?6 ]416-982-8063
Pascal Gauthier, Economist
, ]& e, f- R& n7 ]# n416-944-5730
; ]* i3 P% a9 R* N$ \; i
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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