TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
8 ^* i7 f8 R8 m# T! ~5 ^) l! Afrom 2002 to 2008, unsustainable price increases drove
1 o: W4 }& e' q: S$ ^* y6 Sunsustainable levels of building. Our view is that house
9 V: b8 v# u8 z3 B5 ~0 L2 Iprices exceeded the value of housing that was justified by
) ^# [$ V1 V2 T- `" s5 Yfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
) }. {- Y' A/ m! E! g& |4 E# j# x# p2 rthat exceeded its fundamental-justified level by approximately
9 S7 Z, h7 e7 g: X" z0 X12%, an excess that was exaggerated in the past
three years.
5 [0 }7 n0 ?& X# B1 R$ |" xBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
, t7 q$ G6 s" O7 ]1 ^3 `" A) f9 a; yboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
" F" y& ^6 d+ Q' a& F) R2 nthat this demand cannot be sustained; and “supply-driven”
' z3 V* |- i8 o8 ~9 n4 W, r2 Cwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
; I! D& a6 W  g2 E( @% vhomebuyers pushed homebuilding to an unsustainable pitch
. }1 R, s& X* M$ Pthat is now being rapidly reined in.
; n7 D) [# U0 s% ~' I! z. d1 iWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
3 w8 q; Y* e4 m9 [6 @means a deepened slump. This overbuilding will likely weigh
- N+ |" I! b" K# T( Hon markets over the next few years. Even as Canada recovers
- Y4 E! L; A" F4 E9 ~4 Vfrom the cyclical downturn, house price growth will
% z0 b* |7 u( w7 \remain choppy and new residential construction will be
) _& {5 c, b0 S8 U+ A) h( j1 Z& v# Ndampened, owing to this structural weakness. Construction
! x/ N' l$ b( v$ ^4 b0 wis now undershooting fundamentals and we expect this
/ X% ]( t4 V; z& z) z' ato persist over 2009 to 2011. We anticipate that nationwide
# w$ N+ ~8 r5 D3 A2 \3 d' xresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
! ~4 R; R# ]6 D- e3 P- Din the fourth quarter.
/ j' j- f' i% C" R! p5 rTo quantify the degree of overpricing and overbuilding,
0 S8 k) Q7 \: Y$ t. e8 e0 K' Fwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
8 ]7 O2 ^9 M6 mprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
. j. K/ o( v3 j0 r+ Tlong-run. Since homebuilders build to meet demand, we
5 u2 b( o3 x+ i0 L7 l, L. Mregard housing prices and household formation as the drivers
( [+ o2 j5 ^2 Dof 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
7 A$ X% [: }& h+ k1 C! c8 z/ \fundamental-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,
where housing demand will further contract under waning
% K/ Z# r8 b9 ~. t) H( Rpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
" w$ W! ~! A- {4 ~" Tvery 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
8 f' m3 h$ H+ |$ S5 X# X" G5 yweakness, will be singed by the downturn nonetheless.
6 X& q) c% |3 Q4 N4 a$ gQuébec shows signs of strain – especially given the
; t, J2 q" i$ c( D! |strange accumulation of unabsorbed multiples on l’Île de
/ P4 Z. f, u9 B4 ~+ |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
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
5 S* D5 _0 f1 Y" b1 b7 \high levels of apartment-style units presently under
, F+ s( _& z5 R3 P6 Sconstruction mean that record numbers of condos will
# ?! b- h$ _$ j# b" d3 wreach completion during 2009. If absorption rates fall, as
. f# U3 v, F1 Y9 h, a/ @cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
3 G2 x: T+ X2 w+ O" Lresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
9 _! S; a. _* u6 ?8 y/ D( ~* S+ ointer-provincial and international migration over the coming
$ l; u% l" T/ _; A, kyears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
: L+ X* e  a2 SMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
9 c) C) O9 M: S1 X1 [- J416-982-8063
0 C% V4 u, `3 I+ @3 N) P. c* f& FPascal Gauthier, Economist
+ A: p3 a' A% Q6 n416-944-5730
4 d; x+ I+ j) y) Y7 h) Q
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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