The initial panic created by COVID-19 threw the entire global markets off balance. Nobody knew what would happen because a pandemic of this scale has never been seen in modern times. Despite all our advances in medical science, we did not have an action plan to contain the spread.
Several months on, we’ve transitioned into a COVID economy. Businesses have reopened, and the new normal seems to be catching on. The social-distancing practices managed to slow down the spread of the novel coronavirus and possibly delay the inevitable housing market crash.
However, the second wave of COVID-19 infections is creating a surge that could contribute to several factors and catalyze the feared housing crash before the year ends.
An increase in unemployment
We are seeing record unemployment rates worldwide and in Canada. The government’s instruction to lock down everything led to millions losing their jobs. The economy is gradually reopening, but many businesses have gone under due to the lengthy downtime. People have started returning to work, but many are still relying on government benefits to earn an income.
The decreased buying power due to rising unemployment is a major factor contributing to a potential housing market crash.
Loan defaulters could rise
The government benefits are helping people retain better liquidity and allowing people to continue managing their expenses like paying their mortgages. Like the Canada Emergency Response Benefit (CERB), the Canada Recovery Benefit (CRB), and Employment Insurance (EI) benefits will also end.
Between joblessness and a lack of stimulus funds, people might begin defaulting on loans. While banks have set aside provisions for loan loss, financial institutions with substantial mortgage exposure could be in major trouble.
The disparity in demand and supply
Investors who are a few months in arrears may try to get something out of their assets by selling their properties. However, the diminished buying power might not be able to overcome the incentive of the low-interest-rate environment. It is possible that we might see a surge in supply with no demand due to a lack of buying power. The result can be a devastating pullback in housing prices.
Protect yourself from the crash with gold
A housing crash seems inevitable. However, experts have predicted it wrong so many times over the years. It is still possible, and I would suggest being prepared for it. A housing market crash can cause a chain reaction that could cause the entire stock market to experience a severe downturn.
If you are considering betting against the market, I would advise investing in a stock like Barrick Gold (TSX:ABX)(NYSE:GOLD). The copper and gold mining company is one of the largest gold producers worldwide. It has had its share of rough times, but profits have picked up significantly due to the increasing gold prices.
A volatile market fuels investor panic, and people look towards gold and other safe-haven assets to protect their capital. Investing in Barrick Gold can provide you with the exposure to gold prices you need to profit from the turbulent market. Additionally, it can help you retain your liquidity to quickly take advantage of the discounted prices in the stock market when the situation normalizes.
Nobody can say for sure when or even if a housing market crash will take place. However, the surge of COVID-19 cases could offset all the recovery we’ve seen in the economy and lead to a worse financial situation. It could cause the much-feared housing market crash and have an effect on investor capital.
Gold stocks like Barrick could provide you with protection for your capital. Warren Buffett is already hedging his bets on gold. You might want to consider adding the stock to your portfolio as well.
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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.