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
* ~! E* g2 I& z; G' y6 ^unsustainable levels of building. Our view is that house
( A, r1 F' s4 ]+ J. F) ^- ^& Jprices exceeded the value of housing that was justified by
2 o5 J# P1 L: H$ dfundamentals by approximately 9% nationwide. This
& @& V7 [: o4 i- y& _4 t8 aoverpricing compelled a level of residential construction
. y- r# E3 L# z3 U5 f6 hthat 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
) i% B% H- o% w$ Laffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
to fundamentally justified levels.
5 R, |2 k; O$ J% M: dWe consider “overbuilding” of two forms: “demanddriven”
4 x" C, g) B2 S# ewhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
) E0 y5 `, F6 K4 W9 x5 t) d0 `; Gthere is evidence of both types, we contend that Canada’s
+ S, S* G. W, i+ E0 _) q) y1 g“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
+ n; z/ A7 |+ t1 E5 J, E% z' MWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
" k& G! q  Z9 I8 emeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
3 V7 @) X* s) F# Dremain choppy and new residential construction will be
( L3 G6 m5 A; Rdampened, owing to this structural weakness. Construction
1 }5 ^% K) K. E+ ]0 r4 W9 uis 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
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
/ d1 a9 t6 A3 R+ D+ W3 }we first develop an empirical model, based on long-run
. C9 N5 O5 z/ e0 ?/ cfundamentals 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
0 E' ~8 W: G9 ]2 V# b4 h! tlong-run. Since homebuilders build to meet demand, we
9 B6 D2 j6 Y: f& ~1 ]/ gregard housing prices and household formation as the drivers
of residential construction.
8 K. q; P( Y& d% X" [2 b2 RTo examine the degree of overbuilding, we employ a
% U0 Y. Z* j5 Y“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
- b% A/ \# e( h/ E0 @5 Tfundamental-justified level by about 12%. Although new
1 _5 E" M- c1 W0 c7 ]# I' \units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
- q4 U, q/ e( s( W' Z9 kRegionally, we see the greatest strains on the Prairies,
. D5 q& c$ I: t2 }) ]; {) D$ Owhere housing demand will further contract under waning
' h; ^* J- e0 t0 _. e2 B) U' cpopulation inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
7 o) H- E: |6 \0 ?) D" _, G/ v: E0 Mvery time that the resale market has swung into strong
" B4 Z& v0 S/ G  N2 T# Hbuyers’ territory. Homebuilding in the Atlantic provinces
% T8 A/ ]3 {4 L. l; R) L! C( ~; S! v$ nhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
/ V2 l- f, s0 r- U/ L7 U5 h- \; aQuébec shows signs of strain – especially given the
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
cyclical downturn, the degree of structural weakness appears
8 o2 w' h; r( N! n& }+ q( D$ |limited – with the important exception of the Toronto
0 @$ Q$ \2 F5 K, T  n9 Ccondo market. Both in Toronto and Vancouver, historically
& K! `$ W3 ~6 dhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
4 D7 P( ^! ^. `6 k# h2 Yreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
& n4 p/ C+ `, N0 v4 s$ Q' dspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
8 @: _; u  e- O3 Manticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
5 B2 C; I2 ]2 Wyears, which, along with improvements in affordability,
4 `+ q1 J" x3 U$ owill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
9 [" U) G; ^" {- h, E7 |MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
+ h8 S" K3 O2 ~& @) @0 z( I416-982-8063
Pascal Gauthier, Economist
. M- J$ g4 e) A' j5 R9 N) C416-944-5730
8 ?0 ~, M. w/ T1 W+ {+ P+ T# ]6 N; r
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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