The Motley Fool

2 Reasons a Giant Housing Drop Could Happen This Year

Image source: Getty Images

The substantial turnaround by Toronto’s real estate market with record-breaking housing market rebound is undoubtedly a positive development. It came completely out of the blue for many investors and analysts alike.

However, the current situation could be nothing more than an instance of investors becoming hopeful without understanding the true scale of the situation. Yes, there was a rapid rebound in the housing market to record-breaking values. With the rate of new listings decreasing and high demand, activity rose in June by 84% from May 2020.

People want to take advantage of the low-interest environment to capitalize on investing in real estate. I want to discuss why there are reasons to expect a significant decline in the housing market by the end of the year or 2021.

Dire economic circumstances

Economists from the Royal Bank of Canada took a closer look at the figures for real estate sales in Canada and believe the bounce in sales is overstated. The observation on supply soon outpacing demand, RBC’s thesis might begin to align with Canada Mortgage and Housing Corporation’s (CMHC) prediction.

CMHC anticipates “unprecedented uncertainty” for the housing market due to the dire economic situation. The Canadian economy increased over the past decade by its real estate boom. However, the consumption was mostly fueled by incurring massive debt. In an economic environment where people might not be able to afford to pay down debt, things can become ugly.

Four of the country’s big banks report that inventory is rising faster than sales. An overall increase in listings without a sufficient number of buyers could lead to a decline.

5 Stocks Under $49 (FREE REPORT)

Click here to gain access!

A second wave of infections

The summer heat has done nothing to curb the spread of the virus in our neighboring country down south. Many investors believe that we’re fighting the second wave of COVID-19 infections as the number of cases in the U.S. keeps rising to new heights each day.

The top doctor Dr. Anthony Fauci noted that we are “still in the first wave” just a few weeks ago. The only point of reference we have is the Spanish Flu from 1918, and the second wave of that pandemic was far worse than the first one. Nobody knows enough about the disease to conclude whether we will see another wave or how bad a second wave could be.

It is possible that timely distribution of viable vaccines can prevent a second wave. In case we do not get a vaccine and there is a second wave, we could be looking at a very gloomy year ahead. All the reopened economic activity might come to a halt again and cause a further decline in the housing market.

Finding safer places to park your funds

Despite gradually reopening economies, preparing yourself for a worst-case scenario could be a wise move. The current situation has opened opportunities to invest in beaten-down high-quality stocks that have immense growth potential. However, I would advise not taking unnecessary risks with your funds.

Instead, consider purchasing shares of companies that can protect your capital from another crash. A stock like Fortis (TSX:FTS)(NYSE:FTS) could be perfect to serve that purpose.

A Canadian utility company, Fortis, provides an essential service. The demand for its services is unlikely to decline, no matter how bad the economy gets. The company also relies on regulated and long-term contracts for most of its income. Fortis can keep generating revenue and enjoy insulation from broader market volatility.

It also pays its shareholders a juicy 3.59% dividend yield. It generates enough income to continue financing its payouts without experiencing problems. Fortis is possibly as safe as it can get when it comes to long-term investments that can keep up with inflation.

Foolish takeaway

Warren Buffett invested in the energy sector in a time when nobody saw that happening. It is next to impossible to predict anything that is going to happen accurately. However, there are reasons to believe in the possibility of another housing decline.

I would suggest preparing for it and protecting your capital. Investments like Fortis can help you park your capital in a safe place and keep pace with inflation.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 FORTIS INC.

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.