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TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

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发表于 2009-4-8 15:01 | 显示全部楼层 |阅读模式
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During Canada’s “Housing Boom”, which ran roughly
" N1 j1 f4 Y' x& {from 2002 to 2008, unsustainable price increases drove
  l- E. V( i3 P9 ~unsustainable levels of building. Our view is that house
3 g6 N  X8 T- E8 k( j2 Z+ aprices exceeded the value of housing that was justified by
2 {- e0 j  b# f# M5 `. pfundamentals by approximately 9% nationwide. This8 {& c2 d: `3 o8 J% F; n" R
overpricing compelled a level of residential construction" C: q3 N3 x  f) b
that exceeded its fundamental-justified level by approximately
% `3 f( O7 U& t5 |, v6 X6 u12%, an excess that was exaggerated in the past3 V* s- v/ E) M/ ]6 E/ s0 F" j1 @
three years.
6 O2 U" {& s" s. tBy “overpricing” we mean that prices detached from/ q* H8 E( N) V* L1 `
their fundamentals, as witnessed by a steep erosion of" J7 n; I( u7 p" G2 w/ A
affordability. The current unwinding of house prices reflects
! x9 j; |9 r0 O/ Y  j2 yboth a cyclical downturn and a return of house prices
! r1 w2 v: |1 m8 Bto fundamentally justified levels.8 H0 d! `! u  ^& X, j
We consider “overbuilding” of two forms: “demanddriven”
: m3 I" s- h' Lwhere homebuyers buy up too many houses and
4 B' i0 M$ V9 {6 Mthat this demand cannot be sustained; and “supply-driven”
  Z* {* F- a% Twhere builders accumulate excessive inventories. Although0 q/ O% S* b5 \, a' K4 f
there is evidence of both types, we contend that Canada’s6 r' U8 v7 Z6 }# L& A$ _
“overbuilding” was mainly of the first type, where
- C; v. O* r. Khomebuyers pushed homebuilding to an unsustainable pitch. Y4 G. c, s4 |) a
that is now being rapidly reined in.
, A8 f6 o6 v: F2 M7 bWhile most markets won’t face U.S.-style overhangs,
5 ^5 y+ Z; j# ?/ s$ C$ @9 Rthe construction of too many new homes over the boom
. t: o9 G! j3 u" x; Rmeans a deepened slump. This overbuilding will likely weigh8 L1 k9 w* a" A
on markets over the next few years. Even as Canada recovers- u3 B& u$ m' f3 e! l. x
from the cyclical downturn, house price growth will/ s) p( t# s/ i9 k% \
remain choppy and new residential construction will be
; \9 C$ J" h3 L  j' A: Kdampened, owing to this structural weakness. Construction
) B3 h1 P1 W& F, M. G9 h# G1 M7 P) b* mis now undershooting fundamentals and we expect this% b5 q1 z/ p) K' R* H, ]. h6 a
to persist over 2009 to 2011. We anticipate that nationwide3 U$ O1 F! Z3 @- o: x" r3 s( I
residential construction will fall further to around
& e# C9 n% M6 d, k; \/ y125,000 starts over 2009 with a trough around 115,000 units
0 L% b' M4 g* Q. {% L" kin the fourth quarter.6 c- l9 _2 m# ]
To quantify the degree of overpricing and overbuilding,
% W0 g" t8 S$ ~% J" c7 e) V6 ?we first develop an empirical model, based on long-run3 W' M7 x( e% N* Q/ a# M% A  y- q
fundamentals of house prices and housing starts in each2 f7 _: w1 {2 K( t
province. Affordability is the key concept behind home
8 t2 \: q1 w! Dvalues since house prices should track incomes over the" M* K) B! z3 @" l4 l7 P
long-run. Since homebuilders build to meet demand, we
9 I( Q( \& ~' J, Qregard housing prices and household formation as the drivers
0 r& e5 x) V/ S1 m; Fof residential construction.; n) ~, ~8 ~& ]" ^2 f$ b
To examine the degree of overbuilding, we employ a6 e6 r9 s& f5 a0 q& D) H
“counter-factual,” asking what level of residential construction
' G3 T( a( D, x; q& {. J9 owould have occurred if housing had been priced
5 n6 t' A* l, R9 W! Q- [optimally. We find that actual homebuilding exceeded this
6 e2 W" I- b; Ofundamental-justified level by about 12%. Although new5 C4 d2 Q# S0 N% d" y) {" H: K
units were being absorbed, homebuyers simply bought too- ?3 `3 V9 F. x9 c7 S2 [
many houses at prices that exceeded fundamentals.
! \$ y8 B/ `" rRegionally, we see the greatest strains on the Prairies,
' j- b# D3 z% O- w. [2 l7 w+ jwhere housing demand will further contract under waning
& h6 w& U9 p. \! X! h! s( t  X: Upopulation inflows. Saskatoon, Calgary and Edmonton are- X0 L1 C: g) V. I0 ?3 E. k  e) |
already witnessing surges in their unsold new homes at the  j+ o& r" B& _. L" ]
very time that the resale market has swung into strong
) [' \% O3 Z  a- q# N: @buyers’ territory. Homebuilding in the Atlantic provinces
; v0 T1 i+ h" D7 M% ]has been relatively balanced but, while not plagued by structural7 j) h: Z" e1 K) Y
weakness, will be singed by the downturn nonetheless.
) n  I( Y/ H9 T) M/ q9 a) HQuébec shows signs of strain – especially given the9 u8 u; ^5 I7 P/ Z" q  m
strange accumulation of unabsorbed multiples on l’Île de) Y% ^2 C& p* y8 ^+ W& A
Montréal – but recent building has been relatively balanced,
* k: R* D  C' D& B1 J) S0 _& Jgiven the province’s history of under-building and low ownership6 @" P" p: d. `) z3 @5 [+ ^- m
rates. While Ontario homebuilding will reel from a; ], r; l2 S$ a5 \! a
cyclical downturn, the degree of structural weakness appears- h$ r0 @( I3 o4 b0 ~3 B) \
limited – with the important exception of the Toronto( O4 j, K8 p. V" G
condo market. Both in Toronto and Vancouver, historically
% v4 U5 W. w8 {2 ?high levels of apartment-style units presently under
6 ], _5 P/ g3 M& @8 Hconstruction mean that record numbers of condos will+ t: l/ p: A7 Q/ s4 [9 H
reach completion during 2009. If absorption rates fall, as5 O4 H7 h+ ~8 B  i$ ^7 v
cyclical factors would indicate, condo inventories could
3 e4 t6 [7 k3 c% N9 F+ mspike severely – particularly in Vancouver. However, while
& P6 `# [% {% q: \9 c* f1 uresidential construction in B.C. will definitely droop, we
0 `' Q# ~' L% w8 M; C; V9 }; }anticipate that the West Coast will continue to benefit from
* |0 y9 m( n) [7 B6 o4 Linter-provincial and international migration over the coming
- Q" ]3 i. D6 ]) E" O; C2 Qyears, which, along with improvements in affordability,5 }: R- e! ^7 O1 R
will alleviate some of the pressure from overbuilding.. \: G& L& X  p/ q& D
OVERPRICED AND OVERBUILT: CANADIAN HOUSING0 X0 m. z1 k& a. A2 v( X: m
MARKET RETURNS TO FUNDAMENTALS! p( L5 B4 z- P+ b4 b9 e, s& S. H( E
Grant Bishop, Economist6 t: g0 \$ K6 F" I1 ~
416-982-8063
: _. U9 L2 O6 U+ }: QPascal Gauthier, Economist
0 Y3 L! h( ]& r, J, R! `416-944-5730
: U1 ^2 L# n+ ]
2 p: J+ w( p; \7 N1 i" Dhttp://www.td.com/economics/special/gb0409_housing_exec.pdf
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发表于 2009-4-8 20:39 | 显示全部楼层
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