At the start of 2020, the Canadian housing market looked as strong as it has ever been. January 2020 was the most phenomenal start to the year for home sales since the crash of 2008. Canada’s real estate market made it through a challenging spell between 2017 and 2018 mostly unscathed.
Some companies like Home Capital Group were on the verge of going belly up in 2017, but it came through, and it is stronger than ever. Canadian citizens were, however, struggling with an unfavourable debt-to-income ratio as the year began.
There are concerns that the COVID-19 pandemic and the broader economic shutdown could pose a more substantial threat to Canadians than the 2008 financial crisis.
Canada’s housing market could be on the verge of collapse this year. I will discuss some ways the current situation could lead to a meltdown.
Housing market demand waning
A primary reason why the housing market could crash is due to cratering demand in the residential real estate market. RE/MAX recently released an analysis of the impact that COVID-19 can have on the housing market. It compared the current situation to the SARS outbreak in 2003.
The company reported that the SARS outbreak did relatively little to the housing market. Of course, the problem is that the SARS scare was nothing compared to the ongoing global health crisis. SARS affected a total of 10,000 people worldwide. At writing, COVID-19 has affected 1.9 million people and resulted in almost 120,000 deaths in a matter of a few months.
As a preventative measure to contain the infectious spread, schools, nonessential businesses, and public places around the world have shut down. This is a situation we have not seen since the WWII era.
If the economic shutdown continues, there will be a dwindling demand for more houses. Homeowners will be struggling to make ends meet due to the economic impact of the closure.
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Loan defaults galore
The MNP Consumer Debt Index released a report earlier in March. It reported that almost half of the respondents were on the brink of insolvency. Those who were surveyed indicated that they were $200 or less away from being unable to meet their monthly debt obligations. A quarter of the respondents were already unable to meet the obligations.
With more than two million Canadians forced out of jobs due to the economic shutdown, the situation does not seem like it will let up any time soon. Between the financial crisis and a rising debt-to-income ratio, the chances of an avalanche of defaults are more likely.
Sales have not yet taken a significant hit, and the demand currently is not too low. The government has put forth a monumental policy to prevent a calamitous situation through its bailout packages. Banks are also offering mortgage deferrals to help Canadians through this rough patch. I would still advise caution to investors. Consider a safer dividend stock during the market crash.
Safe dividend stock
A safer investment strategy can help you create a risk-averse portfolio. To achieve that, I think you need to consider reliable assets, like the Fortis (TSX:FTS)(NYSE:FTS) stock. Unlike the broader TSX Index, Fortis is on the rise. The stock is trading for $54.73 per share. It is up 1.86% from its value at the start of the year.
Fortis operates in Canada’s utility sector. Utilities perform better than most other sectors during a recession. It is an essential service that people need, no matter how bad the economic environment can get. Fortis is the premier operator in the industry, and it appears investors are pouring money into the industry for the safety it offers.
Fortis is well aware of its importance. It generates, transmits, and distributes electricity to more than 2.5 million customers. Its customers also rely on the company for gas supply to their homes. Fortis provides its services to Canadians, Americans, and people in the Caribbean countries.
There is a chance that the stimulus package prepared by the Canadian government might prevent a full-blown housing market crash. Still, I believe that it might not be worth taking a significant risk to your portfolio. I would advise building an investment portfolio that consists of safe and reliable income-generating assets.
To this end, Fortis seems like an ideal choice. It operates in a core sector for the economy, the stock is already performing better than the broader market, and it offers a juicy 3.49% dividend yield.
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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.