Bursting bubble means uncertain future

Michael Johansen
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All across the country, headlines are reassuring Canadians: the housing bubble isn’t bursting yet.
The Conference Board of Canada is reporting that the seemingly over-inflated prices charged for homes from St. John’s to Victoria almost reflect their actual values, so if they do start to decline, they’ll only drop a little bit. There’ll be no crash.

The Conference Board is responding to various claims to the contrary.

Both the Toronto-Dominion Bank and the International Monetary Fund, for example, announced early in February that Canadian homebuyers were being charged at least 10 per cent more than their purchases were worth, which was an improvement over the Fitch Ratings Agency’s November 2013 assessment that the figure was closer to 21 per cent; the Organization for Economic Co-operation and Development’s June estimate that it was 30 per cent; and the Deutsche Bank’s December warning that Canadian housing was as much as 60 per cent overvalued.

With its own headline, the Conference Board proclaimed there’s “No bubble to pop in Canada’s housing market.”

Those other banks and agencies, the board says, are making faulty calculations.

Instead of comparing incomes and apartment rents to house prices, which produces a high ratio that suggests overvaluation, the board’s release says they should compare them to mortgage payments.

That shows a more modest ratio and, consequently, suggests that homebuyers are almost getting their money’s worth.

However, according to one of the board’s senior economists, “The housing market may be undergoing a correction in some regions and market segments, but it is more likely to be a soft landing than a bubble bursting.”

The housing market in Labrador’s Upper Lake Melville area could be described as one such segment, except that it is not included in the board’s study area. Nevertheless, residents will soon discover if they’re in for a soft or a crash landing, since the central Labrador bubble has already burst.

All it takes now is to watch how much and how fast it deflates.

The fact that it has been pricked is hard to miss.

House prices and the cost of apartment rentals, which usually just creep slowly upwards year by year, started soaring to dizzying heights when the provincial government began pouring money into the Muskrat Falls dam project, and outside workers — able to pay painfully high rents with their astoundingly high salaries — started flooding into the region.

The cost of buying a house quickly doubled and tripled, while the cost of renting quadrupled or more.

Some homeowners cashed in early and got out of the market and the region, with some early investors snapping up real estate to develop and flip for substantial profits. Many prospective renters and homebuyers (those at least who weren’t being paid bloated Nalcor wages or who represented some contractor newly flush with taxpayer money) suddenly found they could no longer afford any of the asking prices. Rents, for example, have risen as high as $6,000 per month.

But the inflation was counted as an economic benefit until the bubble burst last fall — that’s when developers found that the previously high demand, no matter what the cost, had already evaporated.

As soon as living quarters were set up at the dam construction site, all the hundreds of migrant workers taking the jobs stopped looking for places to live in town.

That has left some housing developers in a bad situation.

After many months of trying to unload their investments onto a flattened market, several cash-strapped entrepreneurs have had to drop their asking prices, or even take their houses off the market altogether and offer them for rent.

So now, people are wondering just how far prices will drop.

A local real estate agent recently told the CBC that he, in essence, expects the “soft landing” promised by the Conference Board for the rest of the country, not the “collapse to a ridiculously low level” feared (or perhaps welcomed) by many of his neighbours and clients.

Whether that plunge will occur, or a recovery will happen, depends on how resilient central Labrador’s economy really is: whether it’s strong enough to withstand the buffeting it’s getting from the government’s disruptive megaproject strategy.

Michael Johansen is a writer

living in Labrador.

Organizations: Toronto-Dominion Bank, International Monetary Fund, Fitch Ratings Agency Organization for Economic Co Deutsche Bank CBC

Geographic location: Labrador, Canada, Upper Lake Melville

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