TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
/ ]' x- p1 I% N0 w( P. _. p' Ffrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
( D3 t+ w' E( o0 tprices exceeded the value of housing that was justified by
) ^5 P6 P" B' ]  k2 jfundamentals by approximately 9% nationwide. This
$ ]3 u0 |0 }4 q( v2 doverpricing 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
, Q, j* L: j8 N- k. otheir 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
. M3 |  T- t, i1 K6 ^2 a; nto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
! @6 n$ V. l/ I6 Vwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
2 e* t+ \% x9 H2 h4 M% O+ {where builders accumulate excessive inventories. Although
' ?( l. l1 c! d7 v# g8 I0 jthere is evidence of both types, we contend that Canada’s
1 @8 t3 Z' w5 \, \9 T$ h“overbuilding” was mainly of the first type, where
* j0 G4 [& i$ B. E8 |homebuyers pushed homebuilding to an unsustainable pitch
+ \9 ?) N2 ^; F* }8 ]! H4 Ethat is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
% [3 l% |" n% _- W8 @the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
$ \; t; n9 n- c8 U6 Aon markets over the next few years. Even as Canada recovers
3 p. P; |3 s/ c4 @# o0 b$ Gfrom the cyclical downturn, house price growth will
remain choppy and new residential construction will be
8 F- U+ X5 g' `* p( Q$ T! d7 Idampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
! K' f' V( Y! _$ g# Z. rto persist over 2009 to 2011. We anticipate that nationwide
7 i/ {/ D7 Q/ b! {residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
9 E" k4 K6 \! a$ k" g* ^in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
) @2 y+ h) u. E* F/ J& M1 Kwe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
5 C' i, g" |; Nprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
* W/ x. ?" ~9 Q& m% n7 cof residential construction.
- ~# |3 J+ Y! ^  _$ Y# ?" p# gTo examine the degree of overbuilding, we employ a
- g( D* I# [4 E* j“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
9 Q- S: s5 U4 X# w& rfundamental-justified level by about 12%. Although new
4 w7 h  f* j4 gunits 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
* g: E6 H$ i5 Z* u1 ppopulation inflows. Saskatoon, Calgary and Edmonton are
3 ]  U: p$ S) W! V% |already 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
weakness, will be singed by the downturn nonetheless.
" `0 y/ y/ f2 e% R* ]Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
* b. m9 _& X/ G5 z% GMontréal – 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
4 T* J: K8 I  }, \& Pcyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
% t) D1 G, }6 e7 i+ K2 I: ?" N6 Nconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
4 ?6 u( R4 W1 B3 }& [& {( _" ?cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
) ^4 Z: t& T. ^  G4 dresidential construction in B.C. will definitely droop, we
. x* V& V4 F5 Zanticipate that the West Coast will continue to benefit from
, |3 [0 q3 c5 E0 Z4 `: ainter-provincial and international migration over the coming
4 ?( g/ y7 _0 {' dyears, which, along with improvements in affordability,
& n. U+ Z/ E9 \3 g! qwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
; M) {$ d6 H0 J  }416-982-8063
# O3 C. X2 \! |Pascal Gauthier, Economist
6 t( e% N  g# }- J416-944-5730
" W) S- S4 C1 W# z6 O* ]1 x# u
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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