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
* P9 W6 h. Z/ g9 @# Tprices exceeded the value of housing that was justified by
- i2 m6 w7 W/ l6 Q+ s, u' Ifundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
* N  x, v3 J$ N$ r: s+ nthat 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
  t7 @1 H2 E( jtheir 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
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
" p- L+ n$ n" k, |: }: u6 N4 l/ R8 hwhere homebuyers buy up too many houses and
" ~/ p5 |" Q* G3 X8 `that this demand cannot be sustained; and “supply-driven”
3 Z9 s* M& j: O) T$ hwhere builders accumulate excessive inventories. Although
9 N! @- n- k$ l( v) p) X2 Wthere is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
  {4 G* i8 q6 M8 Qhomebuyers pushed homebuilding to an unsustainable pitch
# s8 |2 u  G) {, j4 ^that is now being rapidly reined in.
- }9 f  U; ]6 P0 K+ DWhile most markets won’t face U.S.-style overhangs,
4 x$ i' ^& J- o- p9 M1 qthe construction of too many new homes over the boom
# i" p3 j: q, x  s. \4 Pmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
* M' U& }  |  o* H9 ^% a( c7 f) mremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
, s8 y% t5 u1 ~2 E. Ois now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
3 S9 J  d! h7 {  x" j& K; ^* Z125,000 starts over 2009 with a trough around 115,000 units
: i: p( k7 s4 p! a' [" ^# U% G0 {; _in the fourth quarter.
: C9 t1 l" C, C( M1 E2 i7 xTo quantify the degree of overpricing and overbuilding,
$ Z" c& @8 J1 vwe first develop an empirical model, based on long-run
, |& H5 h4 M! v! ^7 }fundamentals of house prices and housing starts in each
( `! g$ F9 P4 [) L" E, u0 H* [0 hprovince. Affordability is the key concept behind home
1 [, D/ s0 H* ]; Evalues 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
# k6 u' e' ?7 C0 Y2 lof residential construction.
2 `  J) ?. y, H+ `# t3 d6 J" pTo examine the degree of overbuilding, we employ a
; a' a& G: b2 l7 g2 R“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
  i( ]% q; z' V" sfundamental-justified level by about 12%. Although new
2 ]0 X. Q7 H6 ^+ v1 r* J1 hunits were being absorbed, homebuyers simply bought too
, n8 ^: b' W* V4 u; D2 Q' s/ amany houses at prices that exceeded fundamentals.
/ {6 s3 h0 }8 t( W" a, e2 F6 vRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
! d. h5 s5 y5 F' lpopulation inflows. Saskatoon, Calgary and Edmonton are
# m9 Y4 n! i6 h, I3 g$ j/ ?already witnessing surges in their unsold new homes at the
' t! f) G2 l9 H! G. L) \very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
! W7 K$ J/ O6 U0 xhas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
) b# c4 ~. R4 A6 S; TMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
7 Y* N) b5 @0 g! t$ \& crates. While Ontario homebuilding will reel from a
) B1 H! r1 b4 G, `  m1 \, qcyclical 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
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
/ s- u( R# w+ r3 n% Wcyclical factors would indicate, condo inventories could
  S: P. s& d2 h+ Sspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
5 _" O: L, `" qinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
* m) W& v* I8 c6 O5 q$ K3 S5 [will alleviate some of the pressure from overbuilding.
! W& E" n6 n" }. X1 }8 HOVERPRICED AND OVERBUILT: CANADIAN HOUSING
8 q/ M* Z! o0 H9 ]( PMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
- P; J. j1 N, e% S416-982-8063
: X# m# p" v) o0 nPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

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