The Motley Fool

WARNING: Canada’s Housing Bubble May Pop in 2020

Image source: Getty Images.

According to experts, Canada has been in a housing bubble for years.

“Let’s drop the pretense,” Douglas Porter, chief economist at Bank of Montreal said in 2018. “The Toronto housing market, and the many cities surrounding it, are in a housing bubble.” According to Porter, Toronto home prices are experiencing “the fastest increase since the late 1980s, a period pretty much everyone can agree was a true bubble.”

Earlier this year, Bloomberg shared similar concerns, saying out of every country in the world, Canada is “the most vulnerable to a house price correction given both the price-income ratio and the price-rent ratio are well above their long-run averages.”

Adding to the issue are several troubling data points regarding consumer preparedness. “It’s concerning that households aren’t building up buffers and prepping for retirement like they used to,” notes Toronto-Dominion Bank analyst Brian DePratto. Statistics Canada recently revealed that the savings rate has fallen to a decade-long low, leaving Canadians vulnerable to a housing correction.

Given recent slowdowns in economic growth and consumer spending, 2020 could be the year the market crumbles. Timing is never certain, but the impacts are.

How to prepare

If the housing market does correct, the impacts could be catastrophic. Just take a look at the 2008 housing collapse in the U.S. if you want to appreciate how calamitous a real estate downturn can be. Millions of Canadians have huge mortgage debts and equity value tied up in real estate. If values dip, the negative consequences will be pervasive.

Getting your lifestyle in order is the first and most important action you can take. Pay down debt, boost your savings rate, and minimize unnecessary expenses.

If you’re in the market for a home, be sure not to overpay, especially in expensive cities like Toronto or Vancouver, where the buy-versus-rent ratio is nearing all-time highs. If you already own a home, crunch some numbers to make sure your payments are still affordable if you lose a source of income or if you temporarily go “underwater” with your mortgage, owing more than the house is theoretically worth.

How to invest

Finally, if you own any real estate related investments, make sure you’re protected from a downturn. Surprisingly, you don’t need to exit the real estate market entirely to insulate yourself from a correction. The following two stocks could sale through a housing bear market with ease, for two very different reasons.

CT Real Estate Investment Trust is one of the most stable real estate stocks on the TSX because it basically only has one customer: Canadian Tire. Canadian Tire divided its real estate business into a separate company in 2013. It still owns a stake, and both parties are incentivized to promote each other’s financial longevity.

As long as Canadian Tire exists, CT Real Estate will do just fine. The stock currently pays a 5% dividend.

Brookfield Property Partners is another stable real estate stock due to its global diversification. The company owns property in Canada ($9 billion worth), the U.S. ($137 billion), Brazil ($3 billion), Europe ($31 billion), and Asia ($14 billion).

Due to its global diversification, a one-off Canadian real estate downturn would have a minimal impact on the company. Brookfield Property currently pays a 5% dividend.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Brookfield Property Partners LP. Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.