Model of Housing Stock for Canada

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    Working Paper/Document de travail2010-19 A Model of Housing Stock for Canada by David Dupuis and Yi Zheng   2 Bank of Canada Working Paper 2010-19July 2010 A Model of Housing Stock for Canada byDavid Dupuis and Yi Zheng Canadian Economic Analysis DepartmentBank of CanadaOttawa, Ontario, Canada K1A 0G9daviddupuis@bankofcanada.caizheng@bankofcanada.caDavid Dupuis is with the Regional Analysis Division based in Montréal.Yi Zheng is with the Canadian Economic Studies Division in Ottawa.   Bank of Canada working papers are theoretical or empirical works-in-progress on subjects ineconomics and finance. The views expressed in this paper are those of the authors.No responsibility for them should be attributed to the Bank of Canada. ISSN 1701-9397 © 2010 Bank of Canada   ii Acknowledgements The authors would like to acknowledge Allan Gregory for an excellent review of oursrcinal draft. We also thank Jason Allen, Jeannine Bailliu, Paul Corrigan, Frédérick Demers, Ramdane Djoudad, Bob Fay, Philippe Marcil, Laurent Martin, Césaire Meh,Bob Amano, Lise Pichette, Oana Secrieru, Samah Torchani, and seminar participants forhelpful discussions, and Sarah Howcroft for excellent research assistance. We would alsolike to thank Glen Keenleyside for his help editing this document. Any remaining errorsor oversights are those of the authors.   iii Abstract Using an error-correction model (ECM) framework, the authors attempt to quantify thedegree of disequilibrium in Canadian housing stock over the period 1961–2008 for thenational aggregate and over 1981–2008 for the provinces. They find that, based onquarterly data, the level of housing stock in the long run is associated with population,real per capita disposable income, and real house prices. Population growth (netmigration, particularly for the western provinces) is also an important determinant of theshort-run dynamics of housing stock, after controlling for serial correlation in thedependent variable. Real mortgage rates, consumer confidence, and a number of othervariables identified in the literature are found to play a small role in the short run. Theauthors’ model suggests that the Canadian housing stock was 2 per cent above itsequilibrium level at the end of 2008. There was likely overbuilding, to varying degrees,in Saskatchewan, New Brunswick, British Columbia, Ontario, and Quebec.  JEL classification: E21, J00 Bank classification: Domestic demand and components Résumé Au moyen d’un modèle à correction d’erreurs, les auteurs tentent de quantifier le degréde déséquilibre du parc canadien de logements au cours de la période 1961-2008 àl’échelle nationale et durant la période 1981-2008 à l’échelle provinciale. Ils constatent,sur la base des données trimestrielles, que le niveau du stock de logements est fonction àlong terme de celui de la population, du revenu disponible réel par habitant et des prixréels des logements. La croissance de la population (le solde migratoire, en particulierdans le cas des provinces de l’Ouest) est également un déterminant non négligeable de ladynamique de court terme du parc immobilier, une fois prise en compte l’autocorrélationde la variable dépendante. Les taux hypothécaires réels, la confiance des ménages et uncertain nombre d’autres variables recensées dans la littérature jouent aussi un faible rôle àcourt terme. D’après le modèle des auteurs, le parc canadien de logements dépassaitde 2 % son niveau d’équilibre à la fin de 2008. Il y a vraisemblablement eusurconstruction, à des degrés variables, en Saskatchewan, au Nouveau-Brunswick, enColombie-Britannique, en Ontario et au Québec. Classification JEL : E21, J00Classification de la Banque : Demande intérieure et composantes
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