Canada’s housing market led another surprising year in 2020 despite the onset of a global pandemic. While investors and analysts kept shouting at the top of their lungs that the housing market will crash, prices kept soaring to all-time highs.
While the housing market might soar higher this year, what are the chances of a housing market crash this year? Let’s look at the situation and discuss the possibility.
Canada’s high-flying housing market in 2020
According to experts from the Royal Bank of Canada, the Canadian housing market could see a record-breaking year in 2021 that sees a cooldown in 2022. Robert Hogue from the Royal Bank estimates that sellers could continue dominating housing markets due to the low supply.
Canada’s housing market looked like it was in severe trouble in mid-2020. Real estate prices have been going higher for the past several years, and it seemed that the bubble would burst under the weight of the economic pressure created by COVID-19.
The Canada Mortgage and Housing Corporation (CMHC) predicted a 9-18% correction in housing prices that would recover by the summer of this year. The UBS Global Real Estate Bubble Index for 2020 indicated Toronto as the only North American city at risk of being a bubble.
Despite all the warning signs and dangers of a major correction, real estate investors did not hold back. Fuelled by historically low interest rates, more time being spent at home, and government stimulus checks, housing activity picked up the pace.
The momentum continues this year
The positive momentum might continue in 2021 due to improving consumer sentiment. Vaccine rollouts, broader economic recovery, and an improving job market could see significant progress this year and drive an increase in housing sales. Robert Hogue predicts that the housing market will continue to see increasing prices throughout the year.
He estimates that the national aggregate benchmark prices will increase by 8.4% this year and 3.9% in 2022. A low supply in the housing market coupled with low interest rates could be the biggest factor for increasing housing prices.
The risk of a crash
Robert Hogue also sees interest rates rising from next year, causing housing prices to decline. Rising interest rates means that Canadians who have been buying houses may no longer have the biggest incentive backing their real estate investment’s affordability.
Increasing interest rates could also lead to a supply shock if Canadian homeowners unable to make their mortgage payments choose to sell their properties instead of defaulting on their loans. A sudden surge in supply could also force many sellers to lower their asking prices, catalyzing a housing market crash.
If you are interested in the real estate sector as an investment, there are better alternatives to buying properties. You can invest in Real Estate Investment Trusts (REITs) like NorthWest Healthcare Properties REIT (TSX:NWH.UN) to capitalize on a more defensive segment of the real estate industry.
NorthWest Healthcare focuses on the healthcare sector. It owns a portfolio of properties diversified throughout Europe and Canada. Its tenants range from hospitals to healthcare offices that rent its properties. The company’s revenues are virtually guaranteed because healthcare is funded by the government in both regions.
NorthWest retains a robust 97% occupancy rate that generates significant cash flows. The REIT could be an excellent way to get substantial returns from the real estate sector without risking significant capital by tying it up in a home.
The Canadian central bank has reaffirmed that it does not plan to change benchmark interest rates until 2023. It means that you might not expect a sharp increase in interest rates anytime soon. Things might even return to normal. However, it can take one unpredictable event to set the whole thing off. The housing market has become a massive bubble, and it could be in for a major correction any time soon.
Investing in safer investments like NorthWest Healthcare Properties might be a better way to go than buying a house in the current market.
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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.