Canada’s housing market has seen some of its most prolific years in the last decade. Ever since the pandemic came along, there has been plenty of speculation about the effects it could have on soaring housing prices. Initially, the ensuing lockdown and loss of jobs led everybody to believe that it would lead to fewer sales and a drastic decline in prices.
The Canada Mortgage and Housing Corporation (CMHC) predicted an 18% downturn in housing prices due to the pandemic. The decline never materialized. While the activity of transactions in the housing market slowed down, fewer sales did not lead to a decline in prices. The Canadian Real Estate Association recently reported that housing prices increased by 6.5% in June.
From what we have seen so far, CMHC’s prediction of a decline due to the pandemic has little chance of materializing. The Toronto Real Estate Board announced that home sales increased 12% year over year in June, and that is a massive jump considering the high valuation of residential real estate.
All of these factors are excellent for real estate investors selling homes and those who own homes. A massive reason for the increase in activity and prices are actually the buyers who cannot afford to buy these properties. The more the housing prices climb, the greater the mortgage you have to take so you can buy one.
A low-rate environment is the primary reason why real estate prices are still high. CMHC has warned the lenders in Canada to reconsider offering mortgages to highly leveraged households. CEO Evan Siddal said that the government-backed insurance provider lost significant market shares since it introduced stricter underwriting regulations to limit lending to high-risk borrowers.
Many private insurers have picked up the business and weakened CMHC’s position in the market. It also reduced the agency’s ability to protect high-risk borrowers in case a crisis occurs. People are buying homes with negative equity, and that can lead to drastic long-term financial troubles.
Siddal predicts that housing prices will fall late in 2020, as the unemployment rate starts to have a more substantial impact on the economy. Despite the low interest rate environment, Canadians will be using a significant portion of their income to pay down long-term debt. The CEO of CMHC has urged leaders in the financial industry to commit to aiding the economic recovery instead of contributing to Canadians’ problematic economic futures.
Protect your capital
If the problematic situation continues and a housing crash does occur, the entire real estate sector will feel the pain. From homeowners and sellers to investors in real estate investment trusts (REITs), the industry will suffer from a decline that could lead to significant losses. If you want to protect your capital from the possibility of a housing market crash, you should consider allocating funds to a non-cyclical asset like Fortis (TSX:FTS)(NYSE:FTS).
I think Fortis is an ideal market crash-protection stock. The massive and well-diversified utility company provides its services for gas and electricity distribution in Canada, the U.S., and the Caribbean. It provides an essential service that people will need regardless of the economic circumstances. Fortis never loses its ability to generate predictable revenue.
The company recently posted revenue growth of 5.4% in its latest quarter, despite the rough time for businesses across other sectors. Operating with largely regulated and long-term contracts, Fortis can comfortably finance its dividend payouts and growth.
If the housing market crash occurs, you will need to consider where to allocate your funds to protect your wealth from the drastic decline. Fortis is an ideal equity to add to your portfolio so your wealth can enjoy relative insulation from a broader market crash. Parking your money in the stock long term can allow you to capitalize on both its capital gains and reliable dividend income. It is also a more accessible investment compared to purchasing real estate that can decline in value.
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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. The Motley Fool recommends FORTIS INC.