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Worth A Read – TD Report on “Demand-Driven” Alberta Overhang April 7, 2009

Posted by DustinRJay in Uncategorized.
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This report is from TD economics.  Below is an excerpt specific to Alberta, with a link to the full report at the end of the post:

“Wild Rose country was overbuilt substantially during its boom years, and mounting inventories in Calgary and Edmonton are cause for concern. Indeed, even over 1991 to 2001, housing starts in Alberta had already overshot household formation by 12%. With oil prices having subsided from their fever pitch and expansion projects now on hold, the net inflow of migrants has slowed dramatically and may even cease completely during 2009. The previous pace of homebuilding could not be sustained and slowed precipitously during the fall. Alberta’s starts further declined to 13,100 units in February, 61% lower than a year prior. With Alberta’s economy set to contract by 2.5% this year in real terms and roughly 10% in nominal terms, homebuilding has likely not yet bottomed. While around 30,000 new households will form in the province during 2009, starts are likely to be nearer 14,000 units on the year.

Even accounting for the population inflows, the province’s homebuilding overshot fundamentals by nearly 10% during the commodity boom. From 1991 to 2006, Alberta has approximately 72,000 more housing starts than new households, and the estimated 13% overshoot of fundamentals during 2002-2008 exhibits this excess. Now, plunging sales-to-new listings ratios and mounting unsold inventories clearly indicate that the present stock of homes is excessive. As of February, Calgary had an overhang of 1,133 unsold units (874 singles and 259 multiples) and a sales-to-new listings ratio of 0.29, indicative of a definitive buyer’s market, having now fallen to its lowest value in two decades. Similarly alarming is Edmonton’s surge in unsold inventories. As of December, Edmonton had 1,747 unsold units (1,254 singles and 493 multiples) its largest recorded overhang ever – and conditions for sellers in the resale market have deteriorated sharply. In both of Alberta’s major cities, homebuilders have worrisome unsold inventories of new singles, and, with demand having cooled rapidly, resale markets already appear saturated. 

The steep appreciation of house prices during Alberta’s boom times now appears to have been far too optimistic.  Although income growth was very strong, Albertan housing during 2007 and 2008 was especially overpriced relative to fundamentals. The quick climb of Albertan resale prices substantially eroded affordability and, even though Albertans were Canada’s highest income earners on average, the growth in household income was not sustainable.  The 9% year-over-year decline in Alberta’s average resale price in February is evidence that past prices exceeded fundamentals. Those inflated prices drove homebuilding in excess of fundamentals. Given Albertans’ deteriorating incomes and the overhangs of unsold inventories, Alberta’s resale prices probably have another 20% leg down over 2009.”

TD Economics Special Report – Overpriced and Overbuilt: Canadian housing market returns to fundamentals