During Canada’s housing boom, which ran from about 2002 to 2008, unsustainable price increases drove unsustainable levels of building, says a special report released Tuesday by TD Economics.

Kevin Lorenzi, BloombergWith Alberta’s economy set to contract this year “home building has likely not yet bottomed,” says a TD report.

House prices exceeded the value of housing that was justified by fundamentals by about nine per cent nationwide.

“ This overpricing compelled a level of residential construction that exceeded its fundamentally justified level by approximately 12 per cent, an excess that was exaggerated in the past three years,” said the report.

Excess inventories in certain markets will prove an additional drag on home prices, it said.

In particular, Calgary and Edmonton have accumulated “worrisome inventories of unsold singles” and that will put further downward pressure on prices in the resale housing market.

“While most markets won’t face U.S.-style overhangs, the construction of too many new homes over the boom means a deepened slump,” said the report authored by economists Grant Bishop and Pascal Gauthier. “Regionally, we see the greatest strains on the Prairies, where housing demand will further contract under waning population inflows. Saskatoon, Calgary and Edmonton are already witnessing surges in their unsold new homes.”
The report said Alberta was overbuilt during its boom years and “mounting inventories in Calgary and Edmonton are cause for concern.”

Even over 1991 to 2001, housing starts in the province had already overshot household formation by 12 per cent.

“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 home building could not be sustained and slowed precipitously during the fall,” said TD Economics.

Alberta’s starts further declined to 13,100 units in February, 61 per cent lower than a year prior. With Alberta’s economy set to contract this year “home building has likely not yet bottomed.”

“Even accounting for the population i n f l ows , the province’s home building overshot fundamentals by nearly 10 per cent during the commodity boom. From 1991 to 2006, Alberta has approximately 72,000 more housing starts than new households, and the estimated 13 per cent overshoot of fundamentals during 2002-2008 exhibits this excess,” said the report. “Now, plunging sales-to-new listings ratios and mounting unsold inventories clearly indicate that the present stock of homes is excessive.”

The report said that 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. In Calgary and Edmonton, said the report, home builders have worrisome unsold inventories.

“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 cl i mb of Albertan resal e prices substantially eroded affordability and, even though Albertans were Canada’s highest i n c o me earners on average, the growth in household income was not sustainable.”