The time to buy is … now?

Russell Wangersky
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Alright — ready for a little heresy? It’s hard to believe that houses on the Northeast Avalon are worth what people are paying for them. It’s hard to believe that the market is truly healthy, or that it will remain that way.

In fact, it’s hard to believe that no one is pointing out the bubble could burst.

First, a caveat: I’m not an expert on realty. But neither, as many so-called experts are, am I in a conflict of interest because my income depends on sustaining the idea that everything’s booming and will necessarily be worth more in the future than it is now.

Now, there are people who do well by high housing prices: realtors, bankers and municipal councils, to name a few, because for all of those cases, their income or tax revenue is proportionally based on housing prices and naturally increases in lockstep with those higher prices.

But outside of those areas, increased house prices merely drag money out of the economy. Instead of buying wine or lettuce in winter or any of those other “luxuries,” the money instead becomes a sunk cost, going into debt servicing and increased tax bills. (Perhaps you could argue that increases in prices also help those who might have bought at lower prices when they go to sell — that might be true, as long as they are not purchasing again in a market that’s charging more than things are worth.)

But look at the hard numbers in our economy: our population is shrinking, or, at best, barely above stagnant, it’s aging dramatically, and while house prices have easily doubled in the last six years or so, no other facet of our economy has performed anywhere near that well. Yet, in number alone, houses are going up faster than the most-optimistic individual population numbers are.

In particular, salaries have hardly kept pace with either the rate of local inflation or the housing market — leaving prices for homes to reside in the only place they possibly can: in the netherworld of dramatically increased household debt.

You could look at it this way: unable to squeeze blood from today’s stunted turnip, increased housing prices are taking money from the only possible place that they can. They’re harvesting all discretionary income not only from the now, but from the future as well.

Now, we are doing it to ourselves: we are, after all, the ones who are putting the money down, who are competing with other buyers to lever the last little bit of cash flexibility we have to try and outbid everyone else — all the while being told that it’s the right thing to do, that the market’s only getting stronger, by exactly those people who stand to make the most from our eager decisions.

Remember the story about the emperor having no clothes?

Maybe the emperor has no real equity — and the only way the shell game works is if everybody continues to believe that it does.

But here’s the problem: even the future is not an unlimited cash-mine. Car dealers, uncomfortable with the take-up on five-year car loans, are now moving to seven-year terms.

But if you look at that pragmatically, they are mortgaging their own future, too, as buyers who might have rolled into new cars five years from now wait to pay off their old cars instead.

I think a housing reckoning is coming to this marketplace, one that will either be precipitated by the tailing-off of people with the necessary available credit, or by something as simple as a very minor escalation in interest rates. Talk to realty lawyers now, and they’ll tell you they’re downright amazed by how close to the line people set their budgets — budgets that buy houses, but only if there are no surprises, no emergencies, and most of all, no increase in rates for a very long time.

Years ago, talking about the stock market, I remember writing that there was something implicitly wrong with assuming that everything would be worth more next year.

Things do not necessarily increase in value, and if they increase in price, that’s not the same thing. The markets found that to be true. I fear home owners will as well.

Russell Wangersky is the editorial page

editor of The Telegram. He can be reached by email at

Organizations: The Telegram

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Recent comments

  • Winston Adams
    November 21, 2012 - 10:32

    Russell, the Royal Bank pointed out a few months back the risk of high house prices and the the affordability considering heating costs etc. In some areas in the country and the USA houses are being rated like fridges, with a energy star rating. This is rather important even for the lenders , to know that the person can afford to keep a high cost house, if heating is much more than estimated. This is another reason why we should be proceeding with a robust efficiency program for heating. It is an alternative to increased costs coming from Muskrat Falls, keeps housing more affordable and adds value in the retail market for houses, as buyers look for the energy star seal. We recently had an upgrade in codes for energy efficiency, but nothing for efficient heating which is the next big and important step. With the cost of MF power being an issue, this question of a housing bubble will be worse when high heating costs is added to the mortgage cost. I beleive some lenders already favour efficient heating systems when issuing mortages. Yet not even the opposition parties are concerned with using efficiency to better the economic well being of our citizens. Once MF is sanctioned those costs are locked in, and a robust efficiency plan is too late to be of benefit , and will see no endorsement by government. Nalcor needs the income from high electricity use. Efficiency gains will hurt their revenue flow.

  • people are long winded
    November 21, 2012 - 10:06

    it says comments; not an essay god D. it; ; j.christ; people are so full of themselves on this site; anyway Russ; housing markets booming due LOW LOW interest rates; money at 4-5 percent; remember the early 1980s; my first car loan GMAC was 28 percent; was going rate at time; and home mortgages jumped up to 10-15 percent; lot a fellows back had walk away from homes..

  • elsh
    November 21, 2012 - 08:41

    I believe Mr. Wangersky might be right in that this bubble won't last much longer as real estate is concerned but what really behooves me is that the these real estate sales people are getting that much more in commissions ( in some cases, double and more) for doing absolutely the same amount of (work ??) as before and nothing extra for the average buyer/seller ... Yes, the prices have increased but the values have not in terms of what could transpire with a housing Bust !!! The average person is being taken royally by these societal leeches and give nothing in return... A ceiling should be put in place so that the average citizen is not being gouged by these brokers and agents and sales people... Tell me, do you honestly believe any of them are worth $18,000 in commissions on a $300,000 home sale for about three to four hours ( work ??) !!!! I think Not !!!!

  • Premier Dunderdale it is not impossible for Newfoundland and Labrador to end up with forty seven per cent of it citizens on food stamps. The United States is there.
    November 20, 2012 - 16:33

    According to Mitt Romney 47 per cent of Americans are on Food Stamps. The United States is so encumbered with debt there is no way of fixing the debt problem it has with the present economic template it works under. Down through the years the United States has gotten past fiscal cliffs by artifically printing more dollars, a right that it was given with the Breton Woods Accord of 1944. The system of printing money without a backing only adds to its debt and does not solve anything with regard to paying of debt. If you are up to your ying yang in debt, the problem cannot be solved by printing dollars to bring the ledger back into black, something has to be produced that brings in real earnings to be applied against the debt. The United States now believes that producing their own energy from their shale oil resource of which they are supposed to have several hundred years supply will be the only way that they can alleviate their debt situation and that is what they are going to be doing. It makes a lot of economic sense to me.

    November 20, 2012 - 14:00

    I think another point missed by all, regardless of the effects of Muskrat Falls, is the number of homes being built. Every town on the Avalon is having a housing boom, and if you look at the Weekend Telegram, you will see hundreds of homes for sale. About 1,000 or more new homes will be built in the next 18 months on the Avalon, possibly more, and when Danny Williams starts his project, many more will be added to this. There will soon be more homes than buyers, and that is what will burst the bubble in housing. All due respect to John Smith, if you have watched what has happened across the USA and Canada, real estate values went down when the bubble burst there. Homes quickly depreciated, and what will happen here is that people buying at these inflated rates will own homes with mortgages worth more than the value of the home. There is no guarantee anymore that homes being built now and in the next year or so will appreciate. That is the new reality for here, it's already the reality all over the continent, our bubble will break!

  • Maggy Carter
    November 20, 2012 - 13:14

    We will see a different provincial government once Muskrat is officially a 'go'. Not that I believe the numbers claimed from a rinky-dinky poll orchestrated by the Muskrat boosters in tandem with Dunderdale's office, but no doubt there is some truth to the notion that a large number of Newfoundlanders have swallowed the bait that this is an opportunity to get back at Quebec. What Dunderdale hasn't told us yet however is that, in order to cough up with our equity share of Muskrat financing, she will have to squeeze every bit of tax revenue possible out of the middle class in this province while at the same time slicing and dicing every expenditure program government has in its budget. Before its over, there will be a lot of weeping and gnashing of teeth in health, education, social services, transportation and public works as government cuts its commitments to the bone. But construction of Muskrat will be well underway before the other shoe drops. That's when shale gas and ramped up economical, renewable energy expansion across the U.S. signal the death of spot markets for Canadian electricity - especially expensive electricity like Muskrat. Just as oil companies begin walking away from their expensive exploration programs offshore NL, the real crash in real estate on the Avalon will be reaching its peak. That's when tens of thousands of Newfoundlanders who have built over-priced homes in the St. John's area start to sell up and relocate to the next big play. With big bills to pay and no one to pay them - then we'll see just how ugly things can get for those left behind.

    • John Smith
      November 20, 2012 - 18:27

      Oh Maggy...please fill us with more of your who can see the truth, and the future so well...I don't know why kings and potentates are not knocking down your door to be told how to run their countries.You seem to have indepth knowledge about every subject under the enlighten us with every word from your wise lips. You truly are something to intelligent...please Maggy...please fill us all with your widom and who are so wise and knowledgeable....

  • I don't understand why nobody in the Newfoundland and Labrador goverment is not pointing out the bubble may burstin the World Economy that we deal with.
    November 20, 2012 - 12:04

    Mr. Wangersy wrote the following statement in his column: ``In fact, it’s hard to believe that no one is pointing out the bubble could burst``. This statement is so true and so sane , I cannot believe that there isn't anybody in the ruling party of the government of Newfoundland and Labrador pointing it out. Are they unaware of what is transpiring in the World Canada deals with? I have pointed out myself on several ioccasion, the fact that the complete economic World that Canada deals with, the United States and the European Union have already fallen off the fiscal cliff a long time ago and cannot find their way out of the morass of the abyss, I, too, wonder why our province is forging ahead with such an expensive project as Muskrat Falls which offers so little producion of energy in a time when everybody finds out that they might not have a pot to urinate into not so far down the road. Just yesterday Cliff Mining announced it is laying off 500 people in Quebec because of the downturn in the price of iron ore and the fact that China is into a downturn in its economy, so YES why are our Premier and her MHAs forging full steam ahead with a project that will laden every Newfoundlander and Labradorian with a debt burden that will most likely sink us and our province into a sea of red that we might never be able to dig ourselves out of. The only ones who will benefit from the Muskrat Falls Project will be those who have control over the development and thus the ``cost overruns`` which we, the electorate of Newfoundland and Labrador will have no control over in a World filled with corruption covered up with embelished accounting.

  • Cyril Rogers
    November 20, 2012 - 10:55

    Sobering article, Mr. Wangersky....and one that many people may well need to heed, Unfortunately, this province has never been through the boom and bust cycles of other jurisdictions so we have little experience of a housing bust. I fear you are right and it will happen's just a question of when. The mega projects will keep things going for little bit longer but look out when there is another downturn or the price of oil fails to reach the peaks the government is expecting. This cycle is based on the hype of high revenues from oil a few years back but...with lower prices and ill-conceived projections by the provincial department, there will be a large deficit this year. The PC administrations of the past 10 years have hyped these rosy projections but it will mostly be ordinary people who get caught in a downturn when housing prices fail to meet expectations. For, despite the surpluses of the past decade, the government has spent it as quickly as it comes in, or, in some instances hoarded it for its wasteful legacy to Danny in the form of Muskrat Falls.

  • John Smith
    November 20, 2012 - 09:50

    You miss some important points russell...first of all houses appreciate after you buy them...while cars depreciate after you buy them...making that analogy patently ridiculous. As well, houses are worht what people will pay for them...not a cent more...nor a cent less...

  • Tim
    November 20, 2012 - 07:38

    Russell, even though you may not be an Expert in reality, the simple fact that you take time to consider the real implications of an over-inflated housing market makes you more perceptive than the seemingly hundreds of opportunists who have taken to call themselves "real estate agents" in the previous few years. (Who all get awards by the way, for some reason).