Housing start data released earlier this week has left TD with the view that Canada is overbuilt according to their latest research note.
Canada is on track to construct about 220,000 units this year, which is just above the average over the prior decade of around 209,000 units per year. The current pace of construction is also well above the average rate of household formation in Canada.
The concern is that there is overbuilding occurring since the construction pace appears to be out of sync with the recent downward trend in the resale market. Almost every city in Canada has seen sales fall on an annual basis – Calgary being a rare exception.
Vancouver sales have plummeted by almost half since February 2011. Toronto sales are down early almost 20% within the last four months alone.
You’ve probably already guessed it: the overbuilding is not a nationwide problem and it isn’t affecting all sectors of the housing market.
When TD says there are overbuilding concerns in Canada, it really means the concern is concentrated in the condo markets of specifically Vancouver and Toronto.
The issue itself is not that there are not enough buyers forthese units. In fact, the large majority of these condo units must be pre-sold before the building can be completed. The concern is that, over the medium term, if these units were not bought by end-users, but by investors, that they will be put up for sale in a market where interest rates are rising, households are pulling back and there will be a large number of sellers competing for a relatively small pool of buyers.
Ultimately, we believe there is a moderate level of overbuilding in some metropolitan areas which should contribute to a gradual price correction over the next few years. The pace of construction, in turn, should trend towards its long-term level consistent with the pace of household formation.
You can download the entire research note here