The boom in the Canadian housing market has really been unstoppable for years. The pandemic even accelerated the pace, making real estate one of the most desirable avenues for investors. However, the housing market can’t remain hot indefinitely and has to cool off at some point. The April 2021 data showed some dampening, resulting in an over 12% decline in home sales month over month. So, is this the start of a prolonged weakness? If so, what should prospective buyers do?
Canadian housing market in 2021
There are more supporting factors for the country’s housing market in the short term. Certainly, home prices have gone to the moon and affordability has taken a huge dent. However, as interest rates remain at record lows, the Canadian housing market could remain at elevated levels.
Notably, according to Canada Real Estate Association’s report, the home price index rose 2.4% in April month on month. This indicates a notable deceleration in prices compared to February and March 2021.
Many experts anticipate a steady increase in interest rates as inflation recently peaked to a decade-high amid the ongoing economic recovery. However, it could still be too soon to raise rates. The unemployment rate is still beyond 8% and we are not completely out of the pandemic yet. Raising interest rates during the half-baked recovery could hinder economic growth. We might see the Bank of Canada gradually raising rates in the second half of next year.
The central bank’s key policy rate is at 0.25% since last year. Notably, when housing markets last collapsed in 1990, mortgage rates were close to 13%, which is significantly higher than current levels.
Additionally, consumer sentiment should improve further later this year driven by mass vaccinations and overall economic recovery. The job market also should see significant progress in the next few quarters on the back of higher corporate investments. Whether this leads to higher demand for real estate or a return to offices post-pandemic remains to be seen.
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Top stock to buy amid the roaring housing market
The strength in the Canadian housing market effectively seeped into related allied areas. One of the top mortgage lending companies, Home Capital Group (TSX:HCG) saw significant growth since last year. The stock has soared a handsome 85% since then. In Q1 2021, the company saw its per-share earnings surge 140% year over year. It had a total loan portfolio of $17.3 billion at the end of March 2021.
HCG stock could be an attractive bet for investors with an above-average risk appetite. The stock might continue to rally amid the expected strength in the housing market for the next few quarters. However, its volatile nature and relatively smaller size could keep conservative investors at bay.
Interestingly, HCG stock does not look too stretched from the valuation standpoint, as it trades around its all-time high. Its price-to-earnings ratio of close to eight times and price-to-book value ratio of 1 indicates room for further growth.
Although the recent housing market data indicated a tad softening, a huge downturn is highly unlikely. Interest rates will be the biggest driver, which we could see changing course next year.
Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.