TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
- Q8 B. e! e' R% d6 x! o  L9 [from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
& P1 f- O# _% `" z* tprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
: v2 s* W( j4 D& {8 poverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
8 c! `; X# e. {- w6 S+ M: q* K12%, an excess that was exaggerated in the past
three years.
7 w  ?" m6 r3 \! JBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
* e( B- v3 q# raffordability. The current unwinding of house prices reflects
1 Y  B. ^2 }7 Rboth a cyclical downturn and a return of house prices
9 a& `% j' Q. x0 G1 y# Lto fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
3 [9 {1 p# e7 F! v, W+ c* fthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
* g! |2 a4 A( U, Lthere is evidence of both types, we contend that Canada’s
9 v  y4 U0 m, o, R  u7 X0 |“overbuilding” was mainly of the first type, where
; m2 a5 ?- h0 I. \% C& ]homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
1 t- s6 U" O- |( i+ ?* [/ O9 y1 ~( HWhile most markets won’t face U.S.-style overhangs,
) \( U; c# I# ~% T, ?. L) e5 G$ e+ Lthe construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
2 N# k6 k# O4 b8 m) won markets over the next few years. Even as Canada recovers
" r. _: B, w8 _% zfrom the cyclical downturn, house price growth will
5 L9 `# q' w0 f6 f2 Xremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
2 Z- s% ]( ^; e% X) Z  N! }to persist over 2009 to 2011. We anticipate that nationwide
: ~" a% f" l# X5 N' Q6 k/ T8 N/ B) Jresidential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
2 I  `7 E) ]2 a5 Nin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
# y: z& R0 P7 n7 V2 c# s% C6 {we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
  [+ Q, X' \$ Z* h- y. q7 M' Bprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
5 f( G- E% c: b/ \  X$ Y# R" `long-run. Since homebuilders build to meet demand, we
5 m) t! s% H5 G8 n8 g9 ]) jregard housing prices and household formation as the drivers
of residential construction.
/ P$ Q( N9 }4 oTo examine the degree of overbuilding, we employ a
) }* Y; F# C$ o. [0 j“counter-factual,” asking what level of residential construction
, @) I2 D# V/ m! M/ }would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
; i0 o: ~4 K6 e- u% m2 B1 Z2 pfundamental-justified level by about 12%. Although new
1 @- E! v1 _2 Y, z" n2 `+ N+ lunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
' v3 ?7 P9 Z% _9 uwhere housing demand will further contract under waning
1 ]! I; d% f/ N. X6 r6 `  Fpopulation inflows. Saskatoon, Calgary and Edmonton are
7 p: b; C7 D7 T$ O3 x" b5 Oalready witnessing surges in their unsold new homes at the
# y" J/ o) g  L: I6 `* rvery time that the resale market has swung into strong
6 K& B+ ?' E0 e7 c/ M; ^buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
6 V- u/ M: M% n5 \& H2 Oweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
0 k/ F- K! V- l' Qstrange 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
! h6 |+ K% H' t) q5 w( F* Mrates. 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
high levels of apartment-style units presently under
( H8 _. ?* X3 n# s2 kconstruction mean that record numbers of condos will
2 c+ ^6 b( ^& F3 ?; e6 v2 L. rreach completion during 2009. If absorption rates fall, as
) @# A1 d8 D$ }0 Wcyclical factors would indicate, condo inventories could
* m3 h% r5 }4 H. f" Cspike severely – particularly in Vancouver. However, while
' }6 o! J( X4 s5 v* P$ J, yresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
4 _2 r  G( E6 ^, `0 I' p( ]inter-provincial and international migration over the coming
# z5 I  t# Z3 [: @  I) Ayears, which, along with improvements in affordability,
) L. v0 f# `) v6 [$ b% _8 P: a) [% Vwill alleviate some of the pressure from overbuilding.
  C' |, C& d9 ?( W, v7 ?8 cOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
. s5 J6 z# b0 I! ^5 FGrant Bishop, Economist
416-982-8063
% U: E; S8 `/ ^Pascal Gauthier, Economist
0 G" }0 S* v1 ^+ X# B416-944-5730

- M. m7 y7 S( r* X  b- _http://www.td.com/economics/special/gb0409_housing_exec.pdf

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