When Will the Canada Housing Market Correct?

Canada housing sales and prices are soaring to start the year. Should investors expect a housing market correction in 2021?

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The Canada housing market has started strong in the first four months of 2021. Back in February, I’d discussed why this bull market likely had legs for the rest of this year and possibly beyond. The favourable policies that have generated these conditions are unlikely to dissipate anytime soon. Still, Canadians have been inundated with articles and analysis suggesting that the housing bubble presents an ever-present danger to the domestic economy. Should investors expect a Canada housing correction? Let’s dive in.

Why the Canada housing market will only get hotter

Earlier this month, the Canadian Real Estate Association (CREA) said that more than 70,000 homes were sold in the month of March. This blew away the previous record of 22,000 transactions. The uptick illustrates just how explosive this market has been. The average selling price for a home sold on CREA’s MLS system was $716,828 — up 31.6% year over year.

In late March, Royal Bank economist Robert Hogue said that the Canada housing market was “overheating.” He warned that these conditions had produced an environment in which buyers and sellers expect prices to increase indefinitely. Hogue, and some of his peers at other top banks have argued for policy makers to step in.

It does not appear that policy makers are eager to intervene in any significant way. Historically low interest rates, surging demand, and low supply should continue to underpin the scorching Canada housing market.

Should investors bet on a decline in 2021?

Home Capital (TSX:HCG) is one of the top alternative lenders in the country. If investors wanted to bet on a decline, this housing stock is one you should avoid. Shares of Home Capital have climbed 6% in 2021 as of early afternoon trading on April 28. The stock is up 85% from the prior year.

In 2020, the company reported adjusted net income growth of 42% to $186 million or $3.54 per share. Meanwhile, mortgage originations increased to $6.95 billion compared to $5.66 billion in the prior year. Home Capital’s total loan portfolio rose 1.8% to $17.47 billion by the end of 2020.

Best of all, Home Capital stock possesses an attractive price-to-earnings ratio of 9.8. This stock, along with the Canada housing market, has plenty of room to run.

Earlier this month, I’d discussed whether new rules were forthcoming in the housing space. Canada’s economy has grown increasingly reliant on growth in the burgeoning real estate sector. The Bank of Canada has said that any significant policy changes could disrupt this fragile economic rebound. For that reason, investors should feel secure in betting against major policy shifts.

Why a Canada housing correction is very unlikely in 2021

Despite general fears over speculation, the Canada housing market continues to benefit from extremely bullish conditions. I’m betting against a major pullback in 2021 and beyond. Meanwhile, Bridgemarq Real Estate is another housing stock I like in this environment. Its shares are up 62% from the prior year. It offers a monthly dividend of $0.113 per share, representing a monster 8.1% yield.

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 Ambrose O'Callaghan owns shares of ROYAL BANK OF CANADA.

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