TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
5 |- W1 W+ G* r& Pfrom 2002 to 2008, unsustainable price increases drove
& ^$ {7 V4 R4 @) I6 M( E" C8 `7 Funsustainable levels of building. Our view is that house
, o: h. x, n4 m- A4 i* _prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
; l% p" Z; m+ p# a8 h12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
& S9 p5 s  p; d7 X1 ^. Ltheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
" |9 ?. g$ l1 e7 p1 t$ bboth a cyclical downturn and a return of house prices
" m2 x" u& b7 h4 O. Q+ i! N% Vto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
* t  u9 @8 a% |/ e' W, qwhere homebuyers buy up too many houses and
' ]' x5 n* W1 A& T3 fthat 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
# P+ W+ E- W1 B( d' B“overbuilding” was mainly of the first type, where
% y9 ~' J" J' O3 H& }. `/ Mhomebuyers 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
, q" D; G* \) ?0 P, Q( pon markets over the next few years. Even as Canada recovers
) ^6 W8 }- i4 _& |6 F9 zfrom the cyclical downturn, house price growth will
# P0 Z7 {7 v- u% a' B6 Q  [. Lremain choppy and new residential construction will be
; y( R& Y8 ~3 o% ?+ s1 X4 qdampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
& M  l5 i2 y3 N2 fto 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.
To quantify the degree of overpricing and overbuilding,
+ p" _" y) F, c# y% ~+ fwe 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
: m' p* h+ }  Q; y" Slong-run. Since homebuilders build to meet demand, we
- V" V1 S! O2 N: Rregard housing prices and household formation as the drivers
5 a$ Q6 }7 F2 u, V! l/ Qof 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
optimally. We find that actual homebuilding exceeded this
- L9 @. t5 _* t$ L2 qfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
, Y; c& g. }  ^0 B0 u2 s, M  e3 g" P1 {where housing demand will further contract under waning
$ e4 F0 y- ~; G. B9 m5 j, y# `population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
( w# Z% O' E: M$ ]* i" ^very 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
Montréal – but recent building has been relatively balanced,
" g6 W0 \$ A" L7 n! L) ogiven the province’s history of under-building and low ownership
% N3 j4 K! t$ w* f5 urates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
& `. F, _* I# D0 @/ L+ zcondo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
6 P4 @5 y6 c* y) Q* J, q/ i, [" v  |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 r/ `7 R4 B# _  kspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
2 l* l+ ]8 T! \% U. r6 Vanticipate that the West Coast will continue to benefit from
7 n2 a/ t: ^. ninter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
# z/ c+ H  e2 ZMARKET RETURNS TO FUNDAMENTALS
# }% Z* Q4 U1 Z; y! a7 k( Q, ~- }Grant Bishop, Economist
5 x0 C+ }2 m0 h. d416-982-8063
Pascal Gauthier, Economist
416-944-5730

# g1 N' o( N. c- M9 B; Thttp://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙