Housing Crash 2021: The Bubble Is Getting Bigger

The Royal Bank of Canada is predicting a greater housing crash risk next year, but it might be worth your while investing in the bank to achieve long-term financial security.

| More on:

Canada’s housing market is stubborn and resilient. Despite a second consecutive month of decline in sales activity during November. Sales activities are up 32.1% year over year, and the Canada Mortgage and Housing Corporation (CMHC) says there is a grim picture of a housing bubble that keeps growing bigger.

CMHC has sounded the alarm of a major housing crash since the middle of the year. Royal Bank of Canada (TSX:RY)(NYSE:RY) has also made statements that corroborate CMHC’s worries about the state of the housing prices. The largest financial institution in Canada has three different scenarios ready for a housing price decline in 2021.

I will discuss the scenarios presented by RBC and what you can do to protect your capital from the effects of a housing crash.

Best-case scenario for the housing market

The base case forecast by RBC is that the real estate prices will rise by 0.6% in the next 12 months. The compound annual growth in this scenario should be 4.5% for the next five years, and the growth is relatively flat.

The best-case forecast by the bank indicates growth in housing prices at the same rate. Ideally, it forecasts home prices to grow by 6.1% in the next 12 months with a compound annual growth rate of 11.1%.

Worst-case scenario for the price drop

RBC also has a worst-case scenario that you should consider. The bank predicts an almost 30% decline in housing prices in the next 12 months, with a 2.9% compound annual growth rate. Unfortunately, the bank’s chief risk officer says that its worst-case forecast is the likeliest of the three.

Housing affordability improved in Canada due to the government’s income support programs like the Canada Emergency Response Benefit (CERB). CERB and its alternatives allowed Canadians a boost in their household income. However, the bank noted that rising prices and falling incomes offset by government stimulus could backfire.

As the income support faded in Q3 2020, the bank observed a 3.1% decline in aggregate income levels. The bank concluded that Canada’s median household would have to spend almost half of its income to carry ownership costs. The affordability is rolling back as prices continue to rise, and government stimulus reduces.

An ideal investment to consider

The decreasing government support as the economy normalizes means that home ownership could become problematic. It may lead to Canadian homeowners defaulting on their mortgage loans or selling their houses in a bid to avoid defaulting on their loans. The result could be a supply shock that could send housing prices declining significantly to fulfill the worst-case forecast by the bank.

While the bank is suggesting that the worst-case scenario is likely for the housing market, RBC remains an ideal income stock for dividend seekers. The $149.22 billion market capitalization financial institution is trading for $104.86 per share with a juicy 4.12% dividend yield at writing.

RBC has an impressive track record for paying its shareholders their dividends for the last 150 years — a fantastic feat because the bank has paid its shareholders through several periods of economic hardships without fail.

Analysts expect the bank’s valuation to continue increasing as the economy recovers. The Canadian Dividend Aristocrat could prove to be a better way to park your funds for long-term passive income and wealth growth compared to the housing market.

Foolish takeaway

As the housing bubble grows bigger, the risk of a significant decline is getting closer to realization. RBC may have a grim prediction for a housing market crash, but the bank itself could be a viable alternative to residential real estate to protect and grow your capital.

I would recommend buying and holding RBC shares if you fear the effects of a housing crash. The stock could provide you with substantial long-term growth for your wealth due to its reliable track record.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »