Why Toronto-Dominion Bank thinks Canada is 'overbuilt'

Canada 'overbuilt'The latest measure of the residential construction sector shows no cracks in the foundation, prompting Toronto-Dominion Bank to warn that Canada is moderately “overbuilt.”

The latest numbers from Canada Mortgage and Housing Corp., released this week, showed housing starts in September dipping to an annual pace of about 220,000, which TD economist Francis Fong notes tops the average of about 209,000 over the past decade.

That added fuel to fears of overbuilding, given that the rate of construction is seemingly “out of sync” with the recent softening in the market for resale homes, he said.

“So is Canada overbuilt?” Mr. Fong asked.

“In our view, the answer is yes,” he wrote in his report.

“The current pace of construction is also well north of the average rate of household formation in Canada. According to the 2011 census, only 177,000 new households were created each year since 2006. This would imply that, over time, we have been building more than the demographic need requires.”

It’s not a problem across the nation, he added, but rather a threat in a “handful” of cities and in the condo sector.

There are particular concerns in the Toronto area, where households have been forming at a pace of 38,000 a year but housing starts have averaged almost 50,000, and in Vancouver, at 15,000 and 20,000, respectively.

“The issue itself is not that there are not enough buyers for these units,” Mr. Fong said.

“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.”

The bottom line for Mr. Fong is that the bank believes there’s a “moderate level of overbuilding” in some cities that will lead to a “gradual price correction” over the course of the next several years as the rate of construction eases.

For Mr. Fong's research, see the accompanying graphic or click here.

Just as an aside, while housing starts are back to pre-recession levels, take a look at Saskatchewan and Manitoba.

“That looks almost pedestrian compared to the explosion in homebuilding in Saskatchewan and Manitoba, which are both seeing activity close to multi-decade highs,” said Robert Kavcic of BMO Nesbitt Burns, though the numbers, as opposed to the performance, of course, are smaller, with Saskatchewan at 9,400 and Manitoba at 7,500 in the same period.

“Not coincidentally, these provinces also sport elevated population growth, relatively high affordability and two of the three lowest jobless rates (by a long shot) in Canada.”

For Mr. Kavcic’s research