The Housing Market Should Drop Well Into 2022: CMHC Report

Consider reducing your position in residential REITs and invest in essential REITs to prepare for a housing market crash.

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The housing market is a significant contributor to Canada’s economy. Rental income provides substantial income to real estate investors, while real estate-related jobs also make a sizable portion of the labour force in the country.

Banks also rely on the real estate sector due to mortgages, and most of the Canadian household debt is tied in with real estate.

In the last two decades, Canadian real estate has proven itself to be a big winner for investors who took advantage of it. Across the country, real estate prices skyrocketed over the last 20 years. However, 2020 might be a far cry from what you might be used to with the real estate sector.

Housing crash prediction

The Canada Mortgage and Housing Corporation (CMHC) forecasts a decline between 9% and 18% for the residential real estate sector that could take place within 2020 or in 2021. The prominent agency’s prediction is sharper than the experts from Royal Bank of Canada, who predict a decline of 7% by mid-2021.

However the situation unfolds, we are in for a substantial crash. The recovery for the Canadian housing market may be in a problematic situation, depending on which area we are talking about.

Recovery for housing after the crash

It is challenging to predict how long the anticipated market crash will last. There is speculation that the recovery will be different across various regions in Canada. According to CMHC, the speed of recovery in markets will vary drastically.

For instance, the cities that can accommodate working from home might see faster recovery than parts of the country where industries cannot lend themselves better to remote work. The energy sector in particular will feel the long-term pains of a housing market crash.

The Calgary and Edmonton real estate markets are prone to suffering for longer due to the reliance on the oil industry. The federal housing agency said that higher unemployment rates and lower income in certain parts of the country would slow down housing starts, bring down sales, and subsequently drive the prices lower.

According to the agency, the market will likely not see valuations or overall performance return to pre-pandemic levels until 2022. Average home prices in some areas like Toronto, Ottawa, and Montreal might bounce back sooner, starting in late 2020, and recover until 2021.

However, areas like Vancouver, Edmonton, and Calgary might recover until much later.

Preparing for the crash

Many Canadian investors with capital tied up in real estate investment trusts (REITs) linked with residential real estate can see their portfolios decline as the housing market declines. I would suggest removing your positions in assets like Killam Properties and Minto.

If you want to retain exposure to the real estate industry, I would suggest opting for REITs with ties to essential industries rather than housing. Consider the likes of NorthWest Health Property Real Estate Investment Trust (TSX:NWH.UN).

The REIT is focused on high-quality healthcare real estate that generates revenue for shareholders. The company owns a globally diversified portfolio for medical spaces. With a total of 135 properties, NWH is a leading REIT for healthcare real estate in Canada, New Zealand, Brazil, Australia, and Germany.

There has always been a high occupancy rate in its facilities. The number continues to rise, and the company’s revenues have increased by 32% in the last four years.

Foolish takeaway

The housing market will witness a drastic decline, and there is no way to predict the timeline for recovery to pre-pandemic levels accurately. If the decline is as bad as the CMHC predicts, more sectors of the economy can suffer. I would suggest seeking essential real estate stocks instead of residential REITs to protect yourself from the decline.

A healthcare stock like NorthWest Health could boost your cash flow while maintaining your exposure to real estate.

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. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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