The Canadian housing bubble has been growing relatively unchecked for a while now, but 2020 and 2021 (so far) have been utterly game-changing for the housing market. Investors are dominating the market, and first-time homebuyers who were trying to take advantage of the low-interest rates were bullied out of the market by institutional and foreign investors.
The housing market has been one of the primary catalysts that drew money back into the economy, but it also becomes a major force in raising the inflation rates to their decades high level. And even though the bubble was expected to cool off in the second half of 2021 (and the housing market might be moving in that direction), Canada’s housing bubble has claimed the second-highest spot around the globe.
Not a desirable second place
While it’s usually an honour to be placed so near the top in most lists and rankings, the list of the world’s largest housing bubbles isn’t one of them. The list was developed by Organization for Economic Co-operation and Development (OECD), and Canada came second to New Zealand.
The list compared several housing market variables, and even though Canada’s real and nominal price growth percentage was less than many lower-ranking countries, the annual credit growth, price-to-income ratio, and price-to-rent ratio are quite high.
The difference between Canada and New Zealand is relatively minimal, but if we compared Canada’s numbers to the U.S., a relatively similar market, the difference is quite stark. At seventh place, the U.S. is quite low on the housing bubble rating, and the price-to-rent and price-to-income are significantly lower, indicating a colossal housing affordability difference.
An investment opportunity?
Even if you have enough capital to invest directly in the housing market, should you? Even if you are planning to buy an investment property, entering this red-hot market and a bubble that’s ready to burst is quite dangerous. If the home prices see a sharp decline or affordability issues force people out into the new, relatively cheaper markets, the rents might also drop in the future.
From both a buy-low sell-high perspective (for capital appreciation) and a reliable income source perspective, a commercial REIT like Nexus REIT (TSX: NXR.UN) might be worth considering. It’s offering a robust 6.3% yield, and even though the stock isn’t precisely discounted, it’s just around fair valuation and a bargain at this price.
While it’s not advisable, if you invest a hefty enough sum in this stock, say around $200,000, which equates to a 20% down payment for a million-dollar property, you will earn $1,050 in a month, completely passive and free from all the obligations of a landlord.
Nexus isn’t a growth stock per se, but in the course of recovery, the stock has grown over 64% in the last 12 months.
Foolish takeaway
The housing market is showing signs of cooling off, but unless prices take a dive off the cliff, most homes will stay well out of reach of a typical home buyer. Negative consequences of this bubble include higher rents not only in the city but in the suburbs as well.
The property prices are outside major cities have also risen sharply, limiting the options of many potential homebuyers.
