TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
. k" w7 n# \% g) B- Y3 T! B; _3 \) mfrom 2002 to 2008, unsustainable price increases drove
# p- S, _5 N2 d+ a+ ]unsustainable levels of building. Our view is that house
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
12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
3 d5 P$ J1 G* Oboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
1 K$ i& {  [7 C7 y2 I5 K" ~( Ewhere homebuyers buy up too many houses and
& f/ M" b& V' b" h8 k: b6 qthat 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
4 _( h* P# A, H  N( N“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
3 C. N( q9 o* Vthat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
% O4 `: M) s- U- e6 }the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
" {- r% u* P* L0 M- r& [  q6 ton markets over the next few years. Even as Canada recovers
" d& I. a  s9 s' [, {4 t! f4 ufrom the cyclical downturn, house price growth will
, h) g6 A# Y( c( cremain choppy and new residential construction will be
0 p# B3 C% p" ?) y8 d. Qdampened, owing to this structural weakness. Construction
" L" t  Y* w4 e7 Gis 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
# u% i$ u* w+ bin the fourth quarter.
5 v3 x8 E# v+ G* |  C" g, D9 w8 wTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
) o! Y, W$ c8 h; Zfundamentals of house prices and housing starts in each
5 M( g) x  P; }& oprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
9 g7 Y8 j; C3 K( J4 D# blong-run. Since homebuilders build to meet demand, we
2 @8 U4 D. z$ v3 K) u  z2 sregard housing prices and household formation as the drivers
8 g* g. M: O/ E  x" n+ hof residential construction.
7 |2 l7 j7 K( Z) DTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
  j" a: P, F" c' ]optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
9 @# p/ E/ W3 `% J8 Hmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
' l/ |) A, R9 y4 \, [; u- Jpopulation inflows. Saskatoon, Calgary and Edmonton are
/ }7 V! ~/ N" a; v6 f* Qalready 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
" Z( L. s/ j& j: _weakness, will be singed by the downturn nonetheless.
/ V9 @4 M+ w; ?Québec shows signs of strain – especially given the
* S8 B( a( h1 _. D. `2 x" G! zstrange accumulation of unabsorbed multiples on l’Île de
$ c2 y' P) b8 IMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
5 j- m7 V9 C! L& N( m' Trates. While Ontario homebuilding will reel from a
  K. i7 G& C$ \5 C% U3 P' a# scyclical downturn, the degree of structural weakness appears
8 u( s, z3 h3 o3 f% `6 [# n; Dlimited – with the important exception of the Toronto
8 j- `+ ?* Q- ^: vcondo market. Both in Toronto and Vancouver, historically
: v. H+ e$ F( Dhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
- `8 ^% b  n0 e) h4 x3 f" \cyclical factors would indicate, condo inventories could
8 @0 `2 |9 R' t7 Zspike severely – particularly in Vancouver. However, while
6 S5 p* e' P8 presidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
8 H$ C0 E7 Z& e7 B! d( q* b! n4 Uinter-provincial and international migration over the coming
6 Q# M! g5 w2 k' N; hyears, which, along with improvements in affordability,
8 p( U9 e6 u* j5 k: ]9 q! `will alleviate some of the pressure from overbuilding.
+ E- X$ F+ W; E/ y% A1 K" |OVERPRICED AND OVERBUILT: CANADIAN HOUSING
* |4 ~2 Y7 H% `# L# D; z0 p' tMARKET RETURNS TO FUNDAMENTALS
/ V+ S9 s! n3 P; K! Q$ {! qGrant Bishop, Economist
416-982-8063
) F- u& f  ]. z: t* A: jPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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