TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
/ m: t2 {! I$ nfrom 2002 to 2008, unsustainable price increases drove
& l% {* m& h$ {7 kunsustainable levels of building. Our view is that house
1 m  V6 {" y/ y- C6 d' yprices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
' k% q3 X7 h& N, H12%, an excess that was exaggerated in the past
three years.
  |5 T4 k& U/ d5 x" S; S  FBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
! P3 K( x( I9 I) B  \) g' gaffordability. 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”
9 d2 x8 X+ o& Zwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
* Z1 ^9 t5 p$ [3 o3 }: ^there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
0 ~  G& }, k# z* xhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While 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
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
- ?5 Y" s9 X1 `% ^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
8 C! I) q, k. P& M125,000 starts over 2009 with a trough around 115,000 units
. l& x# h! p: h* Lin the fourth quarter.
2 M: z- E0 P2 xTo quantify the degree of overpricing and overbuilding,
we first develop an empirical model, based on long-run
, U% e" X- }% _- j0 H, T0 U, Y$ Efundamentals of house prices and housing starts in each
% R( M8 D) f" _+ l; zprovince. Affordability is the key concept behind home
1 H9 F! R1 o1 w' c$ nvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
- }: Z! _) r" ?: Z6 u3 cregard housing prices and household formation as the drivers
4 H4 \, `. C5 w8 Eof residential construction.
7 i; o8 B  c, Q4 Q0 X. B2 ^To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
1 u- l7 Q3 G& K2 A- \9 P6 ~6 t" E) koptimally. We find that actual homebuilding exceeded this
4 [: m7 V7 f2 v8 q) ^7 Bfundamental-justified level by about 12%. Although new
/ s3 R; @+ k5 X, e. ~/ I' @6 nunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
) Q; x( B  U0 }. ~population inflows. Saskatoon, Calgary and Edmonton are
) a# w6 Q3 f" a4 A# D# Jalready witnessing surges in their unsold new homes at the
  u( F1 N: ]/ H# ^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
weakness, will be singed by the downturn nonetheless.
: i; E& F$ U( @! C" j; RQuébec shows signs of strain – especially given the
; G4 V0 q% ]8 D7 gstrange accumulation of unabsorbed multiples on l’Île de
; m" q- Y  M! v6 _1 p' X) zMontréal – but recent building has been relatively balanced,
2 u% w* O* _, ogiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
; S* n0 Z3 v6 {, Glimited – with the important exception of the Toronto
9 D: J. E% P# i5 Gcondo market. Both in Toronto and Vancouver, historically
3 e' B; w" y. {% ~- Zhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
  f6 H5 Q, n& K! X9 ^7 X0 `4 h. y. C3 \1 Yreach completion during 2009. If absorption rates fall, as
) x4 @0 N( h) Ccyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
  r  A& |0 P9 X/ c! Hanticipate that the West Coast will continue to benefit from
8 V. R5 o% A2 P. Kinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
0 |; r$ l6 b  [- ~6 X" h  K( ~5 i0 P) pOVERPRICED AND OVERBUILT: CANADIAN HOUSING
4 N+ J0 l7 E6 S6 v  V" C* c: qMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
$ x5 G5 ^( g! k  e* A# T! H1 r4 NPascal Gauthier, Economist
416-944-5730
9 Z! C# Z2 ?9 P0 S, B/ p$ B
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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