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
unsustainable levels of building. Our view is that house
% S6 k' e  l: Y+ x  hprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
( d$ b6 b4 e6 I  B) J, coverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
" N0 l, W9 r  H3 @* I12%, an excess that was exaggerated in the past
, S( P9 X1 e) [% M' }  ithree years.
By “overpricing” we mean that prices detached from
* b  D$ G; g1 }their fundamentals, as witnessed by a steep erosion of
8 a* H4 c9 s" y$ Gaffordability. The current unwinding of house prices reflects
both a cyclical downturn and a return of house prices
0 o+ i9 W" e( E, q! q! T& \& xto fundamentally justified levels.
! }) r. W8 ^; {# |, e, E- r3 yWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
5 q* U8 K5 x- J% d, Lthat this demand cannot be sustained; and “supply-driven”
' g% g' @6 M" N, ~. Rwhere builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
' {5 y7 o; k$ G" b“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
! @, y2 [, T& G1 K6 K% \! {9 ^that is now being rapidly reined in.
& D8 t, d+ C: f4 {+ fWhile most markets won’t face U.S.-style overhangs,
- v5 \- u  ~3 z% tthe construction of too many new homes over the boom
7 U% y& y$ z( a2 C3 _9 J* Jmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
  T8 J- A1 t/ @9 Cfrom the cyclical downturn, house price growth will
* n, @9 q. K, J$ G- O7 ]remain 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
residential construction will fall further to around
, ?' N9 M* I1 C8 ~7 N# O125,000 starts over 2009 with a trough around 115,000 units
2 ~( O, S1 a4 N% N4 W+ U( `5 R" {in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
/ Q& L1 T1 }) p4 c! t9 A+ Kfundamentals of house prices and housing starts in each
" z9 a1 Q2 R1 v( U) Aprovince. 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
) c+ r9 K: p2 n& D# J6 gregard housing prices and household formation as the drivers
8 |5 ?3 }7 `1 }6 b) \1 Z" bof residential construction.
( F& I. b1 f) N* lTo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
0 O' H  L( q  \fundamental-justified level by about 12%. Although new
& d7 U1 p0 Y+ junits were being absorbed, homebuyers simply bought too
4 D$ i0 _0 Q& r8 a6 A3 g* qmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
. ?8 L  Y' ?4 ?: Y: ]already witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
, b6 t- Z! T, `) i9 jbuyers’ territory. Homebuilding in the Atlantic provinces
( F3 V3 C: I3 k: T9 B' \has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
( j1 f) \8 |+ w1 \4 `Québec shows signs of strain – especially given the
5 u# H4 K% o( ^. T& Cstrange 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
4 M9 }8 V4 k8 ?/ i  a7 P, Erates. While Ontario homebuilding will reel from a
3 G( |+ M; ^3 Z# F! W9 Qcyclical downturn, the degree of structural weakness appears
* Y* ?2 O  z; {limited – with the important exception of the Toronto
0 X8 ]/ y7 e5 q2 y3 Xcondo market. Both in Toronto and Vancouver, historically
/ m: R( r, |& S; P. whigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
' m! n7 Y* C8 _3 Dcyclical factors would indicate, condo inventories could
; ?/ f0 y, Q1 H6 Y  P% @- |+ A- yspike severely – particularly in Vancouver. However, while
$ ~& o1 u% \7 o5 S8 _residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
% U# h* c" u4 I5 J5 mwill alleviate some of the pressure from overbuilding.
$ A% o8 g8 B/ T% X8 FOVERPRICED AND OVERBUILT: CANADIAN HOUSING
4 r( \  ~! J* G0 |  iMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
7 r2 e+ i! _$ t6 \7 p7 D2 K0 }416-944-5730
  @/ P  K$ y/ |/ B- K4 Z
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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