Get Ready for a 7% Housing Price Drop in 2021

Investors of housing stocks like Genworth MI Canada should brace for impact, as housing prices are ripe to experience a significant drop in the coming months.

Community homes

Image source: Getty Images

The Canadian housing market has remained solid for several years, despite fears of a bubble threatening to burst. Analysts constantly predicted an imminent crash that did not occur, and the housing sector entered 2020 with incredible momentum. It rebounded well in the previous two years, with both sales and market activity on the rise.

The sector has grown, despite all the bearish sentiment over the last decade. Everybody expected the momentum to break when COVID-19 struck. So far, the global health crisis has failed to act as the catalyst for a housing crash. In fact, the contrary has happened and left investors, analysts, and industry experts baffled.

Is the housing market still at risk?

Canadians remain optimistic about the performance of the housing sector. The low interest rate environment, government stimulus, and a general belief in residential real estate’s inherent value keep Canadians hopeful about the market. In a recent poll from Nanos Research, 44% of respondents expected the real estate value in their neighborhood to increase in the next six months.

Despite the general hopefulness among a significant portion of Canadians about the housing sector, there could be some dark times ahead. The Canada Mortgage and Housing Corporation (CMHC) has forecasted grave news for the industry since May. The agency predicted a 9-18% decline in housing prices that could continue through 2021.

The government stimulus and low interest rate environment managed to prevent the drastic decline, but the economy is still weak. In a more recent report, the CMHC indicated that home prices across the country could fall around 7% by 2021. The culprit would be the weak economy and unemployment.

The fears of a second wave have led to a reintroduction of restrictions across the country, and Canada could re-enter a lockdown. The recovery could come to a grinding halt quite soon.

A housing stock that could suffer

Decreasing cases led to the reopening of economies across the countries and gave rise to several companies across the board. Canadian housing stocks also experienced a period of strength with a hopeful environment. Companies like Genworth MI Canada (TSX:MIC) have made a strong recovery in the last few months.

Genworth is the most significant residential mortgage insurer in Canada. The stock climbed 35.66% between May 15 and August 11, 2020. However, the stock has fallen 7.80% since August 11.

The nature of Genworth’s business gave it a more positive outlook. Increasing housing activity meant the company could do better business with substantial volumes. A significant decrease in housing prices could send Genworth reeling to further losses.

On the flip side, if CMHC’s prediction does not come true, Genworth could be an ideal bet against the agency. The stock is paying its shareholders at a juicy 6.21% dividend yield.

Foolish takeaway

Investors should be prepared for anything at this point. There are chances that we could see another lockdown and another stock market crash. Stocks like Genworth could severely decline if that comes to pass. However, if CMHC’s prediction does not come true, Genworth could see massive upside potential. I would advise practicing caution.

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.

More on Dividend Stocks

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Passive Income: How to Make $106 Per Month Tax Free

Holding quality, high-yield dividend stocks such as Freehold Royalties in a TFSA can help you earn tax-free income for life.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on it

Stocks like First National Financial (TSX:FN) pay you monthly. You can also earn monthly dividends through portfolio diversification.

Read more »

stock analysis
Dividend Stocks

1 Dividend Superstar I’d Buy Over TD Bank Stock

TD (TSX:TD) stock may look undervalued, but there are reasons for the price drop. Meanwhile, this dividend superstar has more…

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Dividend Stocks

Down by 26.77%: Now Might Be the Perfect Time to Buy Nutrien Stock

This TSX stock has seen share prices fall by over 26% from its 52-week highs, but it might be the…

Read more »

Woman has an idea
Dividend Stocks

2 No-Brainer Stocks to Buy Now With $7,000

Two relatively cheap cash cows are no-brainer buys for investors with $7,000 to invest.

Read more »

dividends grow over time
Dividend Stocks

Buy This High-Yield Dividend Stock in July 2024

Buy this high-yielding dividend stock to lock in inflated yield into your portfolio to generate solid passive income for years.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Where Will Dollarama Stock Be in 3 Years?

Dollarama stock has done incredibly well during economic uncertainty, but what about when the markets recover in the next three…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

TFSA – 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Canadian stocks like Brookfield Corp (TSX:BN) can make wise TFSA holdings.

Read more »