Housing prices in Canada are soaring to ever-greater heights, and it hasn’t curbed the enthusiasm of home buyers or real estate investors. It seems like everyone wants a piece of this hard-asset market before the interest rates spike. Many speculators and financial experts think that the momentum of the market will only go so far before running out of investor-sentiment fuel, and the market will either cool down or dip a bit.
The question is: will it will happen within 2021?
Housing prices outlook 2021
When it comes to housing prices and the growth of the overall residential real estate market in 2021, there are conflicting opinions, but the majority of the predictions fall on the positive side. More big banks, regulatory bodies, and real estate agency associations have predicted that the market might keep rising and finish the year strong. Some believe that the housing prices might not see a significant dip till 2022.
Even if we agree with the premise that home prices will keep increasing, the pace of this growth is debatable. If the home prices keep rising the way they have been in the first two months of 2021, they might reach dangerously high levels. At those levels, there might be more investors and institutions than retail buyers, which won’t bode well for the health of the housing market.
But there is also a strong chance that the government and financial institutions start to control the housing market before the prices grow out of proportion. It would certainly be better than a sharp fall when investors and home buyers start pulling out from a scorching hot market.
An alternative real estate investment
If you are looking to invest in real estate but want to steer clear of the housing market, NorthWest Health Properties REIT (TSX:NWH.UN) might be a healthy alternative. The company focuses on one particular section of the commercial real estate segment, that is, healthcare properties. It has a globally diversified portfolio of 189 properties and is fairly well balanced — at least in three countries: Canada, Australia/New Zealand, and Germany.
Following the REIT tradition, the company offers a mouthwatering yield of 6.4%. And even though it’s not recommended that you put all your eggs in one basket, if you were to put the same amount in this company as you would for a 20% down payment on a home, you can expect a pretty decent payout. The national average home price in Canada was over $620,000 in January, so the down payment would be $124,000.
At a 6.4% yield, that would give you about $660 a month. It might seem lower than the rent you might have gotten from an investment property, but if you factor in the mortgage and property tax payment, a property might take decades to become genuinely profitable (once it’s fully paid off), and the REIT will start paying you right away.
It also comes with a decent five-year compound annual growth rate (CAGR) of 13.9%.
Comparing an actual real estate investment to a real estate stock investment is like comparing apples to watermelons, but it might still be a fruitful comparison to make. Finding the right asset class for your investment capital is just as important as finding the right asset within that class. And unlike the cost-hungry real estate investments, you can achieve significant diversification with relatively smaller investment capital if you stick to stocks.
Speaking of the insane growth of housing prices...
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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.