Over/Under Supply

For awhile now I’ve been thinking about trying to attempt to quantify the relationship between population growth and housing construction. We’ve been hearing for a year or two now about how our city is actually overbuilt to a significant degree.

This of course would come to a surprise to many as just three years ago there was an apparent serious housing shortage, and stories of tent cities propping up around the city. As it turns out that shortage was largely artificial and a result of speculative buying, and as reports such as this one from TD point out that we’ve actually been somewhat overbuilt all along.

So, today I decided to sit down and try to hammer out some kind of quantification for this… but I wouldn’t take any of this as gospel, it’s really more of a scientific wild ass guess then anything. Regardless, on with the show.

This is just basically an overview of the stats from which the subsequent findings arise. So you can examine that at your leisure.

From this data I derived some long term averages and medians to attempt to make something tangible out of that mess. Basically what I found was that for every new unit completed you needed somewhere between a 2.1-2.3 person increase in population.

Those familiar with the censuses probably know that typically Edmonton and centres like it have somewhere between 2.5-3.0 people per household (FWIW, according to the Statcan numbers I have over the last decade Edmonton has came in at 2.73).

So you may be thinking this is the big “Aha moment,” and that that alone proves we’re overbuilt… but no. That would ignore all the redeveloping/rebuilding that goes on, which I think it’s fair to assume makes up that difference. I’m not in the industry, but just as a laymen, to say 20-30% of new construction would qualify as redevelopment/rebuilding sounds reasonable.

So, now assuming that 2.1-2.3 range is appropriate lets compare how many units would be needed to absorb that population increase vs how many units were actually completed over this period.

So here we see the patterns formed by the yearly numbers (non-cumulative). No surprise, the completion numbers tend to lag the demand fluctuations… obviously it takes time to actually build the places. This also doesn’t take into account the relative inventory positions, for that we’d run the numbers cumulatively.

This, I think, is a much more telling graph as it gives a relative supply position (assuming something resembling balance in 1987 of course). It seems to give a believable pattern as one would expect some ebbs and flows as when demand is falling you’d see a large pullback in supply in subsequent years, and conversely when demand returns you’d see an overcompensation in the other direction as builders rush back in.

In any case, one would expect in balanced market conditions that the figures generally fluctuate around zero, which they do. Then we hit the boom.

What I find quite interesting is that the build up of over supply actually came about from 2003, 2004 and 2005… before the price explosion really hit. This was during a time when the market was hot and building steam but prices were still within historical means.

From 2006 until now the over supply has merely maintained… somewhere between 8,000 and 22,000 units if my factors are correct (personally I’d probably place it closer to the 2.2 curve if not a bit below, but that’s just me).

I suspect this pattern may be more due to under-reporting of migration early in the boom, thus oversupply was probably slower to build in actuality as the new construction stats are actuals whereas population/migration are estimates. Over the long term they’re adjusted to be correct, but in any given year they are prone to significant variance with what is actually experienced. But we have to go with what’s given, so I digress.

For arguments sake, lets say it’s in the 10-15,000 range. Which is a significant degree to be overbuilt, even with starts slowing it’s worth nothing that when this data cut off there were still another 11,400 units under construction.

Figuring that all in and the ratio of persons per household and that’s a couple years worth population growth even with zero subsequent starts, maybe even more as migration is slowing. It will take time to absorb all these new units, and it’s going to be a drag on the market.

Of course all that is assuming my little SWAG has any validity whatsoever… which I’m not sure I’d quite extend it, but I think it’s fair to declare it a good discussion piece at least.