It is no secret that the housing market in Canada has been in a challenging situation for the past several years. Prices for residential properties in prime metropolitan areas of major Canadian cities have become too exorbitant. The oil price crash began to create a shaky situation for the Canadian economy towards the end of 2019.
The outbreak of the novel coronavirus that caused the COVID-19 pandemic has catalyzed what could be the worst market crash since 2008. The pandemic has led to global economies coming to a grinding halt as a measure to protect people from the outbreak. The global health crisis is also affecting the Canadian economy.
Should we expect a housing market crash in 2020? It is no secret that the residential real estate market is feeling the clutches of the economic shutdown. Canadian households are already in crunching debt. The pandemic is making the debt crisis much worse.
I am going to discuss the possibility of a housing market crash and two assets you might want to unload if it happens.
Housing market crash
Canadian household debt was more than 100% of its annual GDP. The average person borrowed more money than the entire economic output averaged out to the number of citizens. The ongoing recession is making the situation even worse.
The pandemic has led to all non-essential businesses being shut down to curb the spread. A sudden surge in unemployment coupled with a liquidity squeeze from the big banks, can make the possibility of a housing market crash a reality. People will not be able to borrow any more money, and they might consider selling residential property for drastically lower prices.
The banks have already received more than 500,000 applications for mortgage deferrals since the banks presented the option on March 17, 2020. This is a sign that Canadian households might already be squeezed. As the shutdown continues, the number of people filing for mortgage deferrals can increase further.
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Two stocks to unload
In the event of a housing market crash, real estate investment trusts (REITs) with high exposure to at-risk residential housing markets and lenders with exposure to mortgages on residential properties are likely to crash.
The economic challenges can hit REITs and lenders the hardest. As people are unable to pay rent or mortgages, it will drastically impact income statements for REITs and lenders throughout 2020. REITs with diversified portfolios, ample cash flow, and low debt will likely survive. Diversified banks with strong balance sheets might also survive the housing market crash.
A REIT like Boardwalk Real Estate Investment Trust is not in the ideal position to weather this storm. It has significant exposure to residential properties in Calgary. As the prices in crude oil make things worse, Calgary is likely to see the brunt of the housing market price decline. Boardwalk might find itself stuck in a terrifying situation if the market crash occurs.
Equitable Group is a lender that also faces substantial risk in the event of a housing market crash. Larger banks might have exposure to mortgages that might not be paid, but they deal with more secure loanees. Equitable Group focuses on offering loans to subprime borrowers who are likely to default as the economy dips.
The Canadian housing market has been a cause of concern for the past several years. Canadian households have borrowed too much money since the crash of 2008 to purchase homes. As the household debt burden exceeds the annual GDP, a pandemic is the worst thing that can happen to the economy.
COVID-19 is forcing social distancing, and businesses that are not essential will remain closed indefinitely. Such a situation can cause certain businesses to go belly up. While I cannot say for certain that Boardwalk and Equitable Group will sink, I would advise reinvesting your capital in safer options until the situation improves.
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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.
Fool contributor Adam Othman has no position in any of the stocks mentioned.