Warning: The Housing Bubble Could Get Worse

A housing bubble in Canada seems clearly evident. Bet on the winners, which include residential REITs such as Canadian Apartment Properties REIT (TSX:CAR.UN).

| More on:
Photo of a floating bubble

Image source: Getty Images.

There’s no denying it; Canada is facing a housing bubble. Real estate prices have skyrocketed in recent months, as end users and investors rush out to grab bargains created by the crisis last year. 

If you’re renting or on the sidelines, the barrier to entry is about to surge much higher. Here’s what you need to know about Canada’s housing bubble, its impact on the economy, and the stocks you should buy to gain exposure. 

Housing bubble

In Toronto, the average selling price for all home types was up 14.9% to $1,045,488. Homes in other major cities, from Montreal to Vancouver, were similarly up by double digits. 

However, a double-digit surge in prices doesn’t mean a market is in a “bubble.” A bubble is better defined based on fundamentals. In the case of housing, the fundamentals are income and rents. Essentially, the price-to-rent and price-to-household income ratios are the key metrics to watch. 

Last year’s crisis pushed household income and rents much lower. That means this recent rise in prices is a clear indication of a bubble. The government can step in and prevent it by adding taxes or discouraging speculation. But they won’t. Here’s why. 

Canada’s fragile economy

Housing is, by far, the biggest component of Canada’s economy. In the third quarter of 2020, investment in residential real estate accounted for 9.43% of Gross Domestic Product (GDP). That’s a historical high for Canada and higher than any other developed nation of a similar scale. 

In short, Canada’s economy is overdependent on real estate, which is why the government is committed to keeping prices up, even if that means a housing bubble. This morning, former Bank of Canada Governor Stephen Poloz said, “We cut interest rates in order to boost the economy … If the side-effect is a hot housing market, that’s one I’ll take every day.”

How to prepare

If you’re a homeowner, congratulations on the future windfall. But if you’re an investor, you may want to take a longer-term approach. The ongoing housing bubble, like all other bubbles, must eventually end. Either income and rents need to climb, or prices need to drop in the future. 

Rising rents should benefit real estate investment trusts (REITs) such as Canadian Apartment Properties REIT (TSX:CAR.UN). CAPREIT has a diversified portfolio of residential units across the country. According to its latest filing, occupancy was 98.2%, and the average monthly rent for its portfolio was $1,084.

Meanwhile, the stock is trading at 16.5 times future cash flow per share and 99% of book value. That means the valuation is suppressed at the moment. The ongoing housing bubble should expand CAPREIT’s book value. If you believe rents will rise soon, the company’s cash flow should improve, too. 

Basically, this is a great buy if you believe a housing bubble is inevitable. And all evidence seems to suggest it is. 

Bottom line

A housing bubble in Canada seems clearly evident. Bet on the winners: residential REITs.  

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 Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »