The Motley Fool

Housing Sales up 40%: The Red-Hot Market Could Mean Trouble

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The housing market in Canada is perking up in the third quarter of 2020. A clear example of a red-hot market is the Greater Toronto Area (GTA). Lisa Patel, president of Toronto Regional Real Estate Board (TRREB), reported a strong rebound in home sales for August.

Residential sales in GTA climbed 40.3% (10,775 home sales) in August 2020 compared to August 2019. Sales were brisk in all major home types in Toronto and the surrounding GTA regions. The low-rise market segments, composed of detached and semi-detached houses and townhouses, posted the highest sales growth.

However, is it safe to conclude the housing market boom signals Canada’s economic recovery? If you were to ask the Canada Mortgage and Housing Corp. (CMHC), trouble is looming, and a crash remains a strong possibility.

Cause of the housing boom

The improving economic condition (GDP growth and job creation) and low borrowing costs are why homeownership demand is increasing. Also, most families remained in the GTA and skipped taking a vacation. Many households were scouting the housing market or satisfying curbed demand from the spring.

According to Jason Mercer, TRREB’s chief market analyst, the stiff competition among buyers of low-rise home types is pushing prices upward. Notably, condominium apartment listings are well outstripping condo sales growth.

Developing scenario

The red-hot housing market appears to ride on market sentiment. Property prices are not in sync with local incomes and economic realities or fundamentals. Thus, it raises uncertainty, especially with the coronavirus recession starting to take hold.

Even if potential buyers are plenty, very few can afford given the inflated prices. In the long run, supply could catch up with demand and make housing prices affordable to median households. Meanwhile, CHMC expects the full impact of COVID-19 to emerge and cause economic pain.

Sound alternative

Dream Industrial (TSX:DIR.UN) is a perfect choice. This $1.68 billion REIT owns and operates 262 income-producing industrial properties in key industrial markets across North America and Europe. Instead of losing tenants in Q2 2020, Dream added 60 more leases to its growing portfolio.

There’s significant leasing momentum over the past couple of months. Alexander Sannikov, Dream’s chief operating officer, said the portfolio remains resilient, despite the pandemic. The REIT signed almost one million square feet of leases at attractive spreads.

The COO is confident Dream’s portfolio will continue to post healthy internal growth owing to a diversified tenant base and below-market rental rates. Also, leases across the entire portfolio have a 2% annual rent-escalation clause. Dream is well positioned to pursue its development and asset-recycling plans to improve its portfolio’s quality.

At $11.02 per share and 6.39%, you get value for money. Assuming you invest $200,000, your money will generate $1,065 in monthly passive income. As a mock landlord, you don’t have maintenance and other costs related to property ownership.

Safe exposure

Investors looking for exposure to the real estate sector can forego buying rental properties while uncertainty hounds the market. Instead, you can invest in real estate investment trusts, particularly the ones that own and operate the in-demand industrial properties.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends DREAM INDUSTRIAL REIT.

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