Canada’s real estate markets could see their red-hot streaks end soon, as housing prices and sales continue to drop. Based on data from the Canada Real Estate Association (CREA), home sales fell 25.7% year over year, while housing prices between March and April 2022 declined 3.8%.
David Macdonald, the senior economist for the Canadian Centre for Policy Alternatives, said, “That’s the very beginning of the Bank of Canada’s interest rate hike’s impact starting to show.” He added that while it’s a slow indicator, many won’t see their mortgage payments affected until they refinance or make a purchase.
However, realtors talk of recent encounters involving buyers and sellers. Some homebuyers are backing out from deals and upsetting property sellers. If the situation persists, more sellers might seek legal remedies to prevent buyers from walking away.
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Investment options
TD senior economist James Orlando said, “We are likely to see a continuation of rent price increases alongside rising mortgage interest costs. This will be balanced against the impact of declining house prices.”
Meanwhile, two real estate investment trusts (REITs) in the residential sub-sector are the top picks in lieu of buying real estate for investment purposes. Killam Apartment (TSX: KMP.UN) and Morguard North American Residential REIT (TSX: MRG.UN) have reported strong financial results in Q1 2022 due to strong leasing momentum and higher occupancies.
Strong rent growth
Halifax-based Killam Apartment impressed investors with its strong earnings growth and operating performance in Q1 2022. The $2.18 billion REIT owns, operates, and manages apartments and manufactured home communities in Canada. In the three months ended March 31, 2022, property revenue and net income grew 15% and 118.9% versus Q1 2021.
Also, according to its Philip Fraser, president and CEO, the 5.1% same-property revenue growth reflects the strong demand for housing across all Killam’s markets. The same property apartment occupancy rate increased to 98% from 95.8% in the same quarter in 2021.
A development program is likewise in place and management expects it to deliver much-anticipated growth to Killam’s portfolio this year and the next. At $18.90 per share, the REIT pays a respectable 3.66% dividend.
Enticing REIT
Morguard is equally enticing for REIT investors because of its 3.87% dividend. At $17.93 per share, the stock outperforms the broader market at +2.53% versus -5.28%. This $1 billion REIT leases high-quality, multi-suite residential properties (13,275) in Canada and the United States.
In Q1 2022, total revenue and net income from the real estate properties increased 8.18% and 524.72% versus Q1 2021. Morguard’s basic funds from operations climbed 17.2% over the same quarter last year. Notably, the average monthly rent in Canada and the U.S. increased 3.1% and 9.6%.
The occupancy rates during quarter remains high at 93.8% and 96.2%, respectively. Expect this REIT to keep maximizing its long-term unit value through continues acquisition and active asset and property management.
Deal busters
With inflation at a 31-year high, according to Statistics Canada reported earlier this month that about 25% of Canadians have cancelled a major purchase due to the runaway inflation. However, 12% sped up their major purchases because of the same reason. Today, many prospective homebuyers are re-evaluating their options, while sellers hope to close transactions without delays.
