Will the Canada Housing Market Plummet in 2021?

A recent CMHC report should inspire investors to take the possibility of a Canada housing market crash very seriously.

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The Canada housing market looked stronger than ever coming into 2021. There were many onlookers that called for the downfall for Canadian real estate due to the COVID-19 pandemic. However, the opposite occurred as demand surged. The monumental shift in work-life balance spurred many Canadians to seek new living arrangements.

Today, I want to discuss a recent report that suggests Canada housing is highly vulnerable. Should investors brace for a crash? Let’s dive in.

Why the housing market has cooled in recent months

In August, the Canadian Real Estate Association reported that sales were down 0.5% from July. Meanwhile, home sales had declined 14% from the same period in August 2020. On the other hand, the average selling price was up 13% year over year. Prices have still dipped marginally from the peak the industry peak in the summer of 2021.

Experts pointed out that markets have settled somewhere between pre- and peak-pandemic levels. That means that the housing market is still very unbalanced compared to the historical norm. Meanwhile, sales are down largely because many prospective buyers have been priced out due to ballooning valuations. This is a crisis that the major political parties appeared to have little answers to over the course of the election campaign.

Should investors be worried about a full-blown crash?

Back in February, I’d discussed how shifting policy was one of the few things capable of torpedoing the bull market in housing. This week, the Canada Mortgage and Housing Corporation (CMHC) released a troubling housing market assessment. It determined that Canada’s housing market was overheated, overvalued, and at major risk of a downturn.

The report said that strong demand and price appreciation had led to irrational exuberance among new home buyers. Investors should take this warning seriously. The last time the CMHC released a report this dire was during the 2016-2017 housing market surge. This bull market came tumbling down by the spring of 2017. It nearly led to the collapse of Home Capital Group.

This bull market has been unique as smaller markets have shown price appreciation that we have typically seen in major metropolitan areas. The COVID-19 pandemic has allowed millions of Canadians to work from home. This has allowed workers the freedom to move away from major metropolitan areas to less expensive options. Of course, this flight has led to ballooning valuations in these smaller markets.

Hold this stock to protect against a potential housing crash

A Canada housing market crash would have broad implications for the entire economy. Canada’s economy has become increasingly reliant on the real estate sector. Investors may want to target defensive stocks like Corby Spirit and Wine (TSX:CSW.A). Shares of this top alcohol manufacturer, marketer, and importer have climbed marginally in 2021. However, the stock has plunged 7.4% month over month.

Alcohol consumption has historically been consistent, especially during rough economic periods. Shares of Corby possess a favourable price-to-earnings ratio of 16. It offers a quarterly dividend of $0.21 per share, which represents a solid 4.8% 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 has no position in any stocks mentioned. The Motley Fool owns shares of and recommends CORBY SPIRIT AND WINE LTD CLASS A.

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