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Is a Canada Housing Crash Coming in 2021?

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Earlier this month, I’d discussed whether investors should be worried about a potential market crash. Equities have enjoyed positive momentum since tumbling in the spring. However, the economy remains very shaky. Similar conditions have many worried about the state of the Canada housing market. Should we expect a crash in one of Canada’s strongest sectors sooner rather than later?

Canada housing has roared back to start the summer

When July started, I’d celebrated the return to form for the Canada housing market. The Canadian Real Estate Association (CREA) said that the average price of a resale home was $539,000 in the month of June. This was up 6.5% from the prior year. It was up 10% from the month of May.

Like other sectors, the Canada housing market was reeling from the effects of the COVID-19 pandemic. Real estate activity virtually ground to a halt. Meanwhile, buyers and sellers alike were anxious in a highly uncertain environment. However, as restrictions eased in the late spring, Canadians have shown their willingness to jump right back into the fray.

Skeptics have suggested that this boost in activity could be due to unsustainable factors. Policymakers have introduced more stringent lending rules. Home buyers can no longer put through a down payment with borrowed funds. Moreover, purchasers will also be subject to higher credit score thresholds. Some speculate that this avalanche of activity was timed before the July 1st deadline, when these new rules were officially implemented.

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Should Canadians expect this market to tumble sooner rather than later?

When the COVID-19 pandemic first rattled the country, I’d maintained my positive long-term outlook for the Canada housing market. Housing supply remains very low, especially in major metropolitan areas across the country. Meanwhile, immigration into Canada and migration to these major cities will keep demand strong. The housing market will be tougher to enter for newcomers, but that does not mean it will produce a steep decline. On the contrary, we will likely see the opposite effect.

Two Canada housing stocks to watch

I’m still bullish on the Canada housing market, so I’m also eyeing top alternative lenders on the TSX.

Equitable Group stock has dropped 34% in 2020 as of close on July 23. However, the stock is up 17% over the past three months. In Q1 2020, the company saw adjusted diluted earnings per share fall 38% year over year to $1.70. Meanwhile, its Retail loan and Commercial loan principal outstanding rose 7% and 11%, respectively. It also declared a quarterly dividend of $0.37 per share. This represents a 2.1% yield.

Better yet, Equitable Group last possessed a price-to-earnings (P/E) ratio of 6.3 and a price-to-book (P/B) value of 0.8. This puts the alternative lender in very favourable value territory.

Home Capital Group was counted out by many during the previous Canada housing correction in the spring of 2017. The company has proven resilient, though it also received a boost from Warren Buffett. Its stock has climbed 25% over the last three months. Shares also possess a favourable P/E ratio of 8.6 and a P/B value of 0.7.

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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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

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