TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
( T+ m& `; ~, p, yfrom 2002 to 2008, unsustainable price increases drove
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
0 s4 t& b9 Z- m4 ~' ?) k3 Rthree years.
1 V4 n4 t( I  i% rBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
: l. ^1 P8 h1 L7 m5 gboth a cyclical downturn and a return of house prices
' p& z! _; {3 E: v0 v* X. q5 Yto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
! p; [. R8 z% N( \( s: uthat this demand cannot be sustained; and “supply-driven”
2 U" w! x0 Q" p+ ~0 |where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
0 x: n9 X- }. W6 Z/ P! fhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
$ D: k/ Y8 ~$ [* R: A. ]1 G  mthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
( L, L% ^+ C% Y3 G4 ^" `on 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
( n' a1 C# ~+ ~# {. b* K2 x; _+ hdampened, owing to this structural weakness. Construction
0 w( ?  Y3 l4 G- ais now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
1 F' M+ K. o/ G; n3 Q$ f) @: {" vresidential construction will fall further to around
" r3 Y! p$ l& f125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
# \( e$ l: O' A) e) D4 kTo quantify the degree of overpricing and overbuilding,
4 g& u; l! M7 r- @" O$ e& {" Mwe first develop an empirical model, based on long-run
# v# E: V+ A0 n" q! u  Ifundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
, J8 T. x: s9 b- ?- B  }* [% B. f+ Vvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
, p- I% C2 q) G+ H' H" d+ Bregard housing prices and household formation as the drivers
of residential construction.
9 ^* m5 j( s. b2 B! l; r. k2 `3 {To examine the degree of overbuilding, we employ a
$ n4 t4 u, J( C, @3 m. J. n# ?“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
* V/ Z/ X! N; Z- k- w7 ~+ uunits were being absorbed, homebuyers simply bought too
$ F" S* E2 [$ G7 M5 i5 g  [many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
% M$ O+ A# \* r/ j( }: v, R! owhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
+ m* B5 V' F& overy time that the resale market has swung into strong
, {0 G# }% ^- h' S0 u( O  xbuyers’ territory. Homebuilding in the Atlantic provinces
- K  h) `8 _2 D+ ?# chas been relatively balanced but, while not plagued by structural
: [5 A. b: T: x& n. Q  c2 lweakness, will be singed by the downturn nonetheless.
- m/ S( C  c! E9 Z3 dQuébec shows signs of strain – especially given the
0 Q. l2 l# l( D, V9 o7 ~strange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
& D7 s$ M/ C; H5 S7 [% Xcyclical downturn, the degree of structural weakness appears
5 N# v" K, c) x& [! klimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
& v0 X( R( V+ X/ A& h! Dhigh levels of apartment-style units presently under
' i: K. J6 ?% ]construction mean that record numbers of condos will
! l2 u; S# r& t8 n0 p  ureach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
( K* z$ F" a- H( N1 w+ S+ cspike severely – particularly in Vancouver. However, while
! n& C" R! @2 a. eresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-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
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
5 @  a" f3 E* [) dPascal Gauthier, Economist
416-944-5730
! x/ z5 I# K# P- O0 ^, T: Q
: c$ b$ u" I2 Y9 n+ J2 n% ^http://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙