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CAUTION: Canada’s Housing Bubble Could Pop in 2021

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Canada’s housing market has surprisingly beaten all the odds. We are almost at the midway mark in December, and the feared housing market crash has not come to pass. The average housing price has increased by 17% this year when there were predictions of a significant decline.

The Canada Mortgage and Housing Corporation (CMHC) predicted that housing prices will decline between 9% to 18%, and the opposite took place. However, this does not necessarily mean that the experts are wrong. The housing crash they predicted may arrive in 2021.

Moody’s predictions for unemployment rates

CMHC predicted that the housing crash in 2020 would also make way for a recovery later in 2021. There is another grim prediction that could contribute to a housing market decline. Moody’s expects the unemployment rate to remain at around 9% by the end of the year. It estimates that the housing market could lose its inexplicable momentum in the first half of 2020.

CMHC has predicted that the average housing market could decline by 21% in 2021.

The weaker underlying conditions in the job market could increase vacancy rates and delinquency. Another contributing factor could be a decline in demand for housing in major Canadian cities like Vancouver and Toronto due to lower migrant in-flows amid the pandemic.

Moody’s has predicted a 7% decline in the housing market. The rising household debt for Canadians could also add to real estate investors’ worries about buying residential properties in 2020.

The effect of low-interest rates

While there are factors pointing to a housing crash next year, there are also signs pointing elsewhere. The low interest rates could be a major reason why we have not seen the housing crash everyone feared in 2020.

The Bank of Canada responded to the onset of the pandemic by slashing interest rates and mortgage rates. The Canada Revenue Agency (CRA) pumped liquidity into the economy through the monumental Canada Emergency Response Benefit (CERB) and its alternative programs. These two factors undoubtedly contributed to a surprisingly bullish housing market.

However, the lower mortgage rates might still be impossible to tackle for Canadians if the global health crisis does not see a positive development.

A safer alternative to housing

If you are worried that Canada’s housing bubble will pop in 2021, there are better ways to invest than buying homes. If you want exposure to the real estate sector without the risk of owning any properties, Real Estate Investment Trusts (REITs) could be the way to go.

NorthWest Healthcare Properties REIT (TSX:NWH.UN) is a REIT that can offer you exposure to another segment of Canada’s real estate sector that could be safe from the effects of a housing crash. It is a healthcare REIT that leases out office space and healthcare clinics, operating throughout Canada and Europe. Healthcare in both regions is largely government-funded. NWH’s revenue is essentially backed by government resources, making its income secure.

Government-backed revenue significantly reduces the risk to income for the REIT compared to leasing to private tenants. NWH had a 97% collections rate in Q2 2020, a 97% domestic occupancy rate, and a 98% international occupancy rate in the same period. The healthcare REIT fared far better than most of its peers in other segments.

Foolish takeaway

Safety is the name of the game when it comes to navigating a housing market crash. Despite further predictions, the housing crash might not occur. However, investors who do not want to take the risk can consider investing in better alternatives. A security like NorthWest Healthcare REIT can provide you with safer exposure to the real estate sector.

Its valuation is $12.56 per share and offers its investors payouts at a juicy 6.44% dividend yield at writing. NorthWest Healthcare could be an excellent long-term investment for your portfolio.

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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 NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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