A Bank of Canada official has said that home prices are due for a pullback. Carolyn Rogers’s comments came after sales of all property types declined last month. Transactions dropped 41% in April compared with a year earlier, according to the Toronto Regional Real Estate Board (TRREB).
“Housing price growth is unsustainably strong in Canada,” Rogers said. “It would not be a bad thing for the economy for the growth in housing prices to moderate a bit, and we do expect that to happen as rates go up. It needs to happen.”
TRREB President Kevin Crigger thinks rising interest rates are successfully cooling Canada’s white-hot housing market.
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No reason to rejoice
Unfortunately for many prospective homebuyers, even if prices drop, the rising interest rates will force them to delay purchases or consider renting. (The 12% decline in new listings in April compared with a year earlier indicates that property owners aren’t keen on selling, either.)
Home price growth in Canada since pandemic lockdowns have been lifted has been astounding, and the market imbalance has only deepened the continuing affordability crisis. First-time homebuyers are the hardest hit.
RBC economist Robert Hogue forecast prices to peak this spring before declining by 2.2% on average in 2023. But with rising borrowing costs, potential homebuyers might have to stay on the sidelines until further notice.
Meanwhile, those who already own property face their own set of challenges. Homeowners who bought at the top of the market and need to sell quickly could withstand big losses, said Hélène Bégin of Desjardins Economic Studies. If prices drop, they might not recoup the premium paid on their property.
Residential REITs: Another way to invest in real estate
Even though rising inflation can be painful for those wanting to invest in a home, there are other ways to invest in real estate, and inflation can actually benefit some of those alternatives. Real estate investment trusts (REITs) stand to gain from rising inflation. According to Nareit, real estate rents and values tend to increase when prices do. That makes top residential REITs like Canadian Apartment Properties (TSX:CAR.UN), known as CAPREIT, and Killam Apartment (TSX:KMP.UN) attractive options today, especially for dividend investors.
Analysts are bullish on CAPREIT, an $8.74 billion REIT with quality residential rental housing in Canada, Ireland, and the Netherlands.
Despite the shares’ 18% year-to-date decline, analysts expect CAPREIT to hit about $66 in the next 12 months. The current share price is around $48, and the dividend yield is 3.03%.
Killam Apartment is also down for the year, though I expect the real estate stock to rebound soon. The $2.22 billion REIT owns and operates apartments and manufactured home communities in Canada. First-quarter property revenue and net income increased 15% and 118.9%, respectively, compared with the same quarter a year earlier.
CEO Philip Fraser said the results reflect strong demand across all its markets. The REIT currently trades around $19.32 per share and pays a 3.67% dividend.
