TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
4 h- i* Q7 o8 O$ Wprices exceeded the value of housing that was justified by
: [* Z" ~' U& H; B* T% q8 s  Yfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
% v; C  h5 s5 ?' Z) ?that exceeded its fundamental-justified level by approximately
- b) s9 X8 J. L( ]7 d7 y8 h4 ]12%, an excess that was exaggerated in the past
, ^* A* S! H8 _4 t8 Athree years.
/ R/ E; d1 I6 g' I8 CBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
' w: D+ d, `! ]+ ?7 R; Iaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
) N: }* b8 E0 b( ?( N; nto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
8 n  i  j/ H# n4 ~1 wthat this demand cannot be sustained; and “supply-driven”
$ A# m6 u! W1 ~! Hwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
/ Q$ _, a  ?# E( H5 \) j, dhomebuyers 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
( m8 G/ F+ b% z7 ?on markets over the next few years. Even as Canada recovers
0 b0 J. ^+ M' b- E% F$ p/ wfrom the cyclical downturn, house price growth will
5 M) d2 R5 T9 M) i6 Y* ~remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
+ I- `4 ^% c* b5 Z% _4 ais now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
  s+ P$ K) {1 hTo quantify the degree of overpricing and overbuilding,
6 Q' L" \& X1 U* w8 iwe first develop an empirical model, based on long-run
fundamentals 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
7 s+ Y, [( T- d5 O' d3 ?1 slong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
$ L) o# e) ^/ ~/ Zof residential construction.
3 r: H! K) O% ?/ b& [7 uTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
5 ?2 ~, K# j; m! I' m- G/ a# mwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
- q* \8 l$ v5 o, p7 _; W. ~fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
- M) |0 z6 t1 Y$ Omany houses at prices that exceeded fundamentals.
4 R4 o# B" e, p0 o& C8 gRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
2 [+ X' _$ x% [* P# w. O' i  y  f! @population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
$ I9 s  ^+ O: N( qbuyers’ territory. Homebuilding in the Atlantic provinces
" p' |, v6 S, Whas been relatively balanced but, while not plagued by structural
0 t" `8 n3 g( W4 Z& kweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
2 \  d0 i  j( V- J: A4 T  TMontréal – but recent building has been relatively balanced,
* w! m6 O7 ?" s, A6 V2 bgiven 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
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
1 p* f3 |! b" f) u0 ghigh levels of apartment-style units presently under
1 q# e: ?1 Y! Z; ]# ^& j/ l% hconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
& X' B+ M8 b' h3 p+ @cyclical factors would indicate, condo inventories could
) |" j: x1 L7 p4 k6 r; o5 @" T* D; ~  Zspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
, A  v, J% q" f) I3 s0 Lanticipate that the West Coast will continue to benefit from
$ W5 F1 ?9 A3 x# j& V5 xinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
6 Q; ]6 U6 m8 @* [OVERPRICED AND OVERBUILT: CANADIAN HOUSING
' \; \! t% J6 L. B/ ]3 o& HMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
/ o" @3 T  r( ?7 w) Y416-982-8063
8 |  @( s& s% w9 V! J  K3 ~Pascal Gauthier, Economist
7 B. H& C+ q# v5 g5 {3 I! m3 S416-944-5730
& N8 T7 u6 Z9 W
. i5 Y1 _$ r0 h. P4 m) b+ D8 Z0 Qhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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