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
8 [0 _& w/ g# N8 B& {6 s& y/ n( gunsustainable levels of building. Our view is that house
" q3 t3 @; z, }( z1 C/ W+ a) kprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
+ ]0 y6 L; Y7 s  uoverpricing compelled a level of residential construction
8 x. z- \7 ^5 C+ j1 h7 Fthat exceeded its fundamental-justified level by approximately
% c4 W/ }8 E) d* B+ e12%, an excess that was exaggerated in the past
2 ]( I: x! R9 Z5 m. {three years.
By “overpricing” we mean that prices detached from
' C1 U$ Y1 o. K, u" y1 Utheir 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
4 \# l8 A8 Z. Yto fundamentally justified levels.
! P3 m' S4 n" r; X) H8 ]5 kWe consider “overbuilding” of two forms: “demanddriven”
3 X  i/ E, Z! @; m5 }where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
, k5 S+ M+ ]. z9 @8 c6 }there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
7 D5 W6 s2 a5 Y7 {' D# Q& X  t( xhomebuyers pushed homebuilding to an unsustainable pitch
7 ~' i: _4 ]" h" xthat is now being rapidly reined in.
7 {; X. _9 c1 _4 TWhile 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
- M% Y* ~4 m- Q  c& h% K1 hon markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
) a% V' N  X$ U$ s3 H& y9 Ddampened, owing to this structural weakness. Construction
is 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
7 _4 ~% `- C1 r8 y' r! Ain the fourth quarter.
* D9 r2 o3 Y2 d* h/ y0 }  u6 YTo quantify the degree of overpricing and overbuilding,
0 C. u' Q: W2 H9 i/ ~7 Cwe 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
8 n" I" ~5 G- Z  |5 u2 Y9 Ulong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
/ x: v1 k  A' L8 b2 P- w( Lof residential construction.
To examine the degree of overbuilding, we employ a
( |$ m( K" }% B% I( c! a( O“counter-factual,” asking what level of residential construction
2 Q- J8 u7 U, m0 i' @6 Uwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
4 r$ n0 U" v6 V0 t6 vfundamental-justified level by about 12%. Although new
. z, t# r8 k5 ^" G+ uunits were being absorbed, homebuyers simply bought too
( e( R: v# h+ Jmany houses at prices that exceeded fundamentals.
2 @$ i1 A& [, m$ m9 QRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
7 D' ]$ \% P8 \- p9 N& lalready witnessing surges in their unsold new homes at the
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
& O' y4 T/ I# o$ z3 y6 gweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
! f: L; C' J) c0 E/ n# t: ^strange accumulation of unabsorbed multiples on l’Île de
3 o9 q: b/ p  N. VMontréal – but recent building has been relatively balanced,
( [7 i& l' ]- J4 J0 @$ R3 Zgiven the province’s history of under-building and low ownership
5 U# H3 T: o  r  b1 _" Urates. While Ontario homebuilding will reel from a
7 U0 u9 @5 V2 r1 f+ ^. a0 w# t1 L" _6 _cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
: r7 y/ X" p5 A. _* gcondo 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
spike severely – particularly in Vancouver. However, while
8 Y# I; F0 s" A0 P+ Xresidential construction in B.C. will definitely droop, we
% B, C( L0 K7 k$ Lanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
$ m* Y$ S* b5 q% G+ S7 h7 nyears, which, along with improvements in affordability,
# q' |. t( O+ S" nwill alleviate some of the pressure from overbuilding.
2 c/ x$ ?0 g$ P6 HOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
2 ], o4 i# r# l9 ^7 I% rPascal Gauthier, Economist
/ n! A% k. s! u  I- Y4 Q' W- W* y8 c416-944-5730
& I( M4 [/ R5 \  E. `2 L. v
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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