A warning about investing in resource-driven markets

As Canada’s west coast starts to feel the impact of the decline in oil prices, investors and homeowners in Labrador West are seeing first-hand the risks associated with owning property in a resource-driven market.

The town of Wabush, home for many years to a productive iron ore mine, once boasted five-bedroom houses that rented for $5,000 a month.

But the resource, a key ingredient in steel, has seen its price fall 60 per cent in three years. That five-bedroom house is now renting for $1,500, a 33 per cent decline in rental value.

“It’s been a period of upheaval,” said Mark Mahoney, a broker at Shoreline Mortgages, who estimates that the market has crashed by around 25 per cent in the past few months alone.

“Home prices have declined dramatically,” he continued. “There were some attempts to get the mine re-opened and there are some signs that may happen [but it’s unlikely at this time].”

When the housing market in Labrador West was at its height, residents were forced to relocate because rents were too high and they could no longer afford to live there. Now, these properties are on the market at discounted prices, with security deposits and first month’s rent waived.

Ron Thomas, president of the Iron Ore of Canada in Labrador City, said that several people have lost money, their livelihood and their investments after buying overvalued homes.

“There’s about 150 homes on the market now and there’s pretty much no work to be had,” added Thomas, who grew up in Labrador. “People are selling their properties or trying to find work so they can pay their mortgages. It reminds me of what it was like in the 1980s when every other house was boarded up.”

More than a decade ago, the average home in the area cost around $50,000, but with the mines in full swing, the population ballooned and new migrating workers had little choice but to buy in.

The Wabush mine has all but closed, leaving thousands of young people unemployed. The Bloom Lake mine in Quebec was also closed, virtually crippling a region that just two years ago, was selling homes for an average of $400,000.

With talks around reopening the mine all but dead, things are looking bleak. What’s more, the influx of foreign workers has all but shut domestic workers out of the retail market in Labrador City.

Many are selling their properties regardless, but they are also taking some pretty frightening losses.
One example, provided by Thomas, is a house purchased for $450,000 that later sold for just $250,000.

“It’s boom or bust out here,” he added.

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