TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
& q) A* Q, C/ _/ `; dfrom 2002 to 2008, unsustainable price increases drove
* r0 k4 c( L) p+ Vunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
2 l! V" l- H$ `- w" m& u6 |overpricing compelled a level of residential construction
# J8 j) V- _: l; v  D% lthat exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
+ W2 b6 |, \2 D9 E0 Kthree years.
+ C& v2 d- B& _; [By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
2 [; Z" k" X% t" {; f* ~: X: faffordability. The current unwinding of house prices reflects
+ `" [" G1 g* w( O' ~5 M5 }6 Jboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
+ K/ i& m1 z8 n7 @6 uWe consider “overbuilding” of two forms: “demanddriven”
! _1 S) D: [9 Q6 u  E  x5 Rwhere 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
1 f/ x3 p" x( y! y9 f“overbuilding” was mainly of the first type, where
  @% Z+ u5 Q. m9 `$ [/ @- ehomebuyers 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
! X, t2 [8 \0 E3 h. rmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
! s8 i8 @! U& @3 R  T) \from the cyclical downturn, house price growth will
8 ?" R, ]1 b9 U; M' Nremain 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
- [- e+ F9 _, _. d! R0 L* lresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
; n7 k, Q' ?, j' Yin the fourth quarter.
1 H, e( B/ A" H8 }1 z1 n/ ZTo quantify the degree of overpricing and overbuilding,
( z5 N: c' m; ?* }  |4 a# nwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
* E: y, N5 Y& M9 v/ a: gprovince. Affordability is the key concept behind home
: n- _5 L3 x. yvalues since house prices should track incomes over the
/ Q7 p: Y' u! y% z0 f5 A* i6 r* klong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
4 D% i1 W6 }4 W7 jof residential construction.
  x; R# @0 P/ I9 ^To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
! X8 b9 s, c% L& O: x9 d( f7 D4 Mwould 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
5 E2 X0 Y; ^/ P- Dmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
. {( C( L1 ~) Q  W+ k5 V2 p: O2 k$ gvery time that the resale market has swung into strong
6 S* [& k" J1 ?' p0 B* e' mbuyers’ territory. Homebuilding in the Atlantic provinces
; P" T( p5 u8 ]9 b. D0 P: T- ohas been relatively balanced but, while not plagued by structural
$ [+ s# G- ~  i, m" E" Uweakness, will be singed by the downturn nonetheless.
, [4 {+ g+ I7 v( rQuébec shows signs of strain – especially given the
7 {& Z" C/ \1 @. U  {strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
, G) |* o) D3 {# _# D3 l; ]given the province’s history of under-building and low ownership
2 b# Z! P1 f4 M7 h/ C$ ~  a- Jrates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
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
3 t( K3 L( Q5 M  I6 T' Mspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
0 c7 a- }8 h0 w2 Manticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
" v8 L1 S$ I' [* `2 x0 q" ^years, which, along with improvements in affordability,
4 N" b+ J' a, ~* Zwill alleviate some of the pressure from overbuilding.
6 b0 ~7 N0 C% HOVERPRICED AND OVERBUILT: CANADIAN HOUSING
9 F- B- X" ~0 J' @MARKET RETURNS TO FUNDAMENTALS
! V( f0 s7 K0 ?8 M* kGrant Bishop, Economist
416-982-8063
% Y# d) J. k7 F! U3 sPascal Gauthier, Economist
416-944-5730
! d9 ]1 y2 l+ ?' M. _0 ]
" H6 h- `- \7 ihttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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