A Housing Market Crash of Epic Proportions Could Hit Canada Soon

Christopher Liew, CFA
·3 min read
House Key And Keychain On Wooden Table
House Key And Keychain On Wooden Table

The housing market in Canada has been “bubbly” since May 2020 following the easing of lockdowns. September was the fourth consecutive month home sales records were broken. The Canadian Real Estate Association (CREA) reported a 45.6% increase in sales from a year earlier.

Housing prices in Toronto are consistently rising throughout the pandemic. However, the UBS Global Real Estate Bubble Index 2020 names it as the only North American city in the bubble risk zone. Still, a market crash of epic proportions is looming and could happen in Canada soon.

Changing preferences

The Bank of Canada has been guiding households and businesses out of the recession by keeping interest rates at the effective lower bound. Prospective home buyers can obtain mortgages at historically low costs. Economists predict the central bank will maintain the status quo until the second half of 2022.

Meanwhile, brokerage firm Royal LePage says the market continues to be resilient, with 97% of regions reporting higher prices over the last three months. Buyers are looking to move to smaller cities or suburbs and buy homes with bigger spaces. The changing preferences are driving prices higher.

Vulnerable market

The Canadian housing market is at risk of destabilization if prices keep rising at an uncomfortable pace. Soon, prices could far exceed what many households could afford. The spectacular growth during summer or post-lockdown is likely to slow down in winter.

A brutal crash looms if consumer debts elevate to an alarming level. You can include unprecedented job losses, virus fear, and economic uncertainty regarding the factors that will make the housing market vulnerable. Similarly, Angelo Melino, a professor at the University of Toronto, said the government might have to start withdrawing fiscal support at some point.

Based on Finder Canada’s discussions with economists, the average property price increase forecast across ten cities over the next six months is about 2% to 3%. But the Canada Mortgage and Housing Corp. (CHMC) predict a market drop of between 9% and 18% in the coming months when the impact of the pandemic finally takes its toll.

Standout industrial REIT

Real estate investment trusts (REITs) are options for investors if the housing market is fraught with uncertainties. The Canadian real estate sector has been a mixed bag in 2020. COVID-19 is severely beating some REITs, particularly those in the retail, office, and hospitality spaces.

REITs leasing out light industrial properties are the pandemic winners. The pre-eminent choice should be Summit Industrial (TSX:SMU.UN). Aside from its portfolio’s resiliency, the $2 billion REIT pays a handsome 4.11% dividend.

Summit Industrial is a solid investment choice today and in the post-COVID world due to the strengthening logistics demand. The health of Canada’s industrial leasing market remained healthy and stable throughout the pandemic. With online shopping brisk as ever, e-commerce retailers need more logistic facilities and distribution hubs.

This REIT has 158 income-producing assets, mostly one-story properties, for flexible-use such as warehousing and storage, light assembly and shipping plants, and call centers, to name a few.

Resilient — but not quite

There’s a sense of unease in the Canadian housing market despite the robust performance in recent months. However, high unemployment and consumer debt could cause it to overheat and burst the bubble.

The post A Housing Market Crash of Epic Proportions Could Hit Canada Soon appeared first on The Motley Fool Canada.

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends SUMMIT INDUSTRIAL INCOME REIT.

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