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
! G9 k+ g5 c% {) a$ Junsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
8 z3 a/ D! b* n) @9 q0 C- z2 yfundamentals 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
. o% ^& j9 U5 N" _. R* qthree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
" a3 k; I: D* ~( ~both a cyclical downturn and a return of house prices
% R" R# U' ?+ |0 wto fundamentally justified levels.
2 v5 q2 D. p; bWe consider “overbuilding” of two forms: “demanddriven”
8 g. n# c' D2 a: r3 G( y$ v0 q1 P  Y5 Wwhere homebuyers buy up too many houses and
8 G6 h6 R- `0 v. u: gthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
$ p! z+ t; f* E% f  M2 ithere is evidence of both types, we contend that Canada’s
: D3 z- m  _: q7 b8 s“overbuilding” was mainly of the first type, where
$ T: ~. d) P9 \5 }" \homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
' M8 t8 y' A  H5 Q/ I5 AWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
' R- x' a) F4 L6 W( C" t) z. efrom the cyclical downturn, house price growth will
+ ~8 D4 B  [8 A# |' X1 c- X: premain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
0 m$ c  N, U# l" Z; q4 a' lresidential construction will fall further to around
9 N" y2 l. d: z+ l125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
( i! D. D' c" p$ k  rTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
5 L6 r( h6 l5 e, Yfundamentals 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
1 m+ G- a3 K/ g: A) I7 H0 m$ K8 Q* dlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
% {3 l8 w" s- L7 \) D. Z* i4 vTo examine the degree of overbuilding, we employ a
  S" i8 r$ t1 N5 L- j& Y" h“counter-factual,” asking what level of residential construction
1 f" G' l8 [( ]9 }' F! c! }, mwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
3 H# o# ~: U% pfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
, o" |/ Y8 g9 M+ jmany houses at prices that exceeded fundamentals.
7 b6 h4 Q+ \! J8 }1 f+ YRegionally, we see the greatest strains on the Prairies,
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
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
9 W# g8 y# i3 K) t2 Q7 nweakness, will be singed by the downturn nonetheless.
% o* Q8 N  v, ^  w0 j# H) GQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
0 V" W8 F' t# QMontréal – but recent building has been relatively balanced,
0 Z! `2 M0 f  P, {given the province’s history of under-building and low ownership
3 p  j# I( E% _2 L. V/ X6 _rates. While Ontario homebuilding will reel from a
! O2 L1 O1 m+ A: ccyclical downturn, the degree of structural weakness appears
; m+ i/ m( p* {, B5 nlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
3 J3 L. `1 J/ d* V: |( ~high levels of apartment-style units presently under
- ?8 n/ b, d; R# a: b% u" y9 tconstruction mean that record numbers of condos will
) B0 g: G! _6 l, j( {5 P% mreach completion during 2009. If absorption rates fall, as
+ C! c8 ^" T( b! J# v% ~cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
/ o; N+ f3 B- F) ^# c4 `* Jresidential construction in B.C. will definitely droop, we
$ z* U* F% d( N0 K0 l$ @anticipate that the West Coast will continue to benefit from
% r- J7 k; U9 i2 j8 Z. pinter-provincial and international migration over the coming
3 p. X) A. V" S8 S- C5 ryears, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
' M" h& |6 o4 w9 \. I7 YOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
+ p9 n) T9 y+ H9 |416-982-8063
0 D" b# R4 O4 ^Pascal Gauthier, Economist
  d. Q# g6 Q: X2 e# j416-944-5730

( R9 ]6 s6 I+ |http://www.td.com/economics/special/gb0409_housing_exec.pdf

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