TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
8 N5 a, E' E6 q; Z. [6 H& \0 Efrom 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
5 }- ~) H3 c8 Tfundamentals by approximately 9% nationwide. This
( w  R- g6 w4 f3 \& v7 noverpricing compelled a level of residential construction
) o' y% B8 U4 \: ?2 H, ]that exceeded its fundamental-justified level by approximately
6 ?8 `4 n( s4 f' f' @12%, an excess that was exaggerated in the past
three years.
By “overpricing” we mean that prices detached from
; I  n. e0 f% \9 R9 Ztheir fundamentals, as witnessed by a steep erosion of
* Z; H5 X7 E3 D/ s7 {% @+ v% }' Daffordability. The current unwinding of house prices reflects
$ R6 s3 d7 n/ J& R  Oboth a cyclical downturn and a return of house prices
; ^; k" |8 @6 o/ O. _% nto fundamentally justified levels.
( _* Q, D- ~# J; j# x, e; CWe consider “overbuilding” of two forms: “demanddriven”
' d! P4 z; ?0 C* x# v6 h' Fwhere homebuyers buy up too many houses and
) ^+ `9 P! w: D. s9 }) p' J9 sthat 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
“overbuilding” was mainly of the first type, where
  C9 w1 S# h. x, C  l+ e6 A4 v4 jhomebuyers pushed homebuilding to an unsustainable pitch
9 d9 p* r  o& Z2 T1 `3 |that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
6 r9 J1 g1 N7 othe construction of too many new homes over the boom
: X' o' m' g% Zmeans a deepened slump. This overbuilding will likely weigh
4 H7 J1 K( d. O/ \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
8 Y: b) o& g+ F0 K0 i  u) C4 ddampened, owing to this structural weakness. Construction
) x6 D2 l0 p! E; j# eis now undershooting fundamentals and we expect this
% n- E1 B1 y/ M3 i/ M; m" ^to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
7 _7 z2 V/ _* K& f- S* u125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
2 w/ P5 L% o6 ~0 W2 l& {0 e9 P# aTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
0 P2 H( \* ?; b: Y; B: E9 Gfundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
7 G( E4 N) l2 I! Y; B; zvalues since house prices should track incomes over the
, q# e7 K; p3 G; V6 S( M- Ylong-run. Since homebuilders build to meet demand, we
, c9 E/ l. k) hregard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
' D. A) g  I* S0 B! Vwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
+ c5 a" C* B$ h7 @1 C5 t  E6 ^fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
- X1 i6 v0 q' ymany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
+ c7 @$ a1 R0 o: p/ L, b# {where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
3 M+ S$ y' z5 t9 L1 bvery time that the resale market has swung into strong
- B: Q  ^* E; N6 a! ybuyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
( X) D: f: q9 o8 f) Z; s' oQuébec shows signs of strain – especially given the
6 ]6 N, L( L% A1 i' A! tstrange 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
, z" K6 k1 I( R# H! \) K& m5 urates. While Ontario homebuilding will reel from a
7 B$ B, x3 l0 B. [cyclical downturn, the degree of structural weakness appears
/ J* @: V' l  r9 U& A# P" ?% {! ^limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
high levels of apartment-style units presently under
construction mean that record numbers of condos will
  o' J5 k8 {8 C! j( zreach completion during 2009. If absorption rates fall, as
' d1 T$ k4 B4 O5 M7 z$ [4 vcyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
& s" I6 X/ K9 X6 j, ~# O# Xanticipate that the West Coast will continue to benefit from
' R2 X. g7 H* Iinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
& Z+ r( G+ Y) `8 M7 s: COVERPRICED AND OVERBUILT: CANADIAN HOUSING
/ Y& w: i0 h7 g1 H9 a; kMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
4 z9 D  r. A0 d+ ?  L* OPascal Gauthier, Economist
0 V+ w& A( |4 _416-944-5730

4 w7 e  J  J% w+ U6 dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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