Warning: The Housing Bubble Could Get Worse

A housing bubble in Canada seems clearly evident. Bet on the winners, which include residential REITs such as Canadian Apartment Properties REIT (TSX:CAR.UN).

| More on:

There’s no denying it; Canada is facing a housing bubble. Real estate prices have skyrocketed in recent months, as end users and investors rush out to grab bargains created by the crisis last year. 

If you’re renting or on the sidelines, the barrier to entry is about to surge much higher. Here’s what you need to know about Canada’s housing bubble, its impact on the economy, and the stocks you should buy to gain exposure. 

Housing bubble

In Toronto, the average selling price for all home types was up 14.9% to $1,045,488. Homes in other major cities, from Montreal to Vancouver, were similarly up by double digits. 

However, a double-digit surge in prices doesn’t mean a market is in a “bubble.” A bubble is better defined based on fundamentals. In the case of housing, the fundamentals are income and rents. Essentially, the price-to-rent and price-to-household income ratios are the key metrics to watch. 

Last year’s crisis pushed household income and rents much lower. That means this recent rise in prices is a clear indication of a bubble. The government can step in and prevent it by adding taxes or discouraging speculation. But they won’t. Here’s why. 

Canada’s fragile economy

Housing is, by far, the biggest component of Canada’s economy. In the third quarter of 2020, investment in residential real estate accounted for 9.43% of Gross Domestic Product (GDP). That’s a historical high for Canada and higher than any other developed nation of a similar scale. 

In short, Canada’s economy is overdependent on real estate, which is why the government is committed to keeping prices up, even if that means a housing bubble. This morning, former Bank of Canada Governor Stephen Poloz said, “We cut interest rates in order to boost the economy … If the side-effect is a hot housing market, that’s one I’ll take every day.”

How to prepare

If you’re a homeowner, congratulations on the future windfall. But if you’re an investor, you may want to take a longer-term approach. The ongoing housing bubble, like all other bubbles, must eventually end. Either income and rents need to climb, or prices need to drop in the future. 

Rising rents should benefit real estate investment trusts (REITs) such as Canadian Apartment Properties REIT (TSX:CAR.UN). CAPREIT has a diversified portfolio of residential units across the country. According to its latest filing, occupancy was 98.2%, and the average monthly rent for its portfolio was $1,084.

Meanwhile, the stock is trading at 16.5 times future cash flow per share and 99% of book value. That means the valuation is suppressed at the moment. The ongoing housing bubble should expand CAPREIT’s book value. If you believe rents will rise soon, the company’s cash flow should improve, too. 

Basically, this is a great buy if you believe a housing bubble is inevitable. And all evidence seems to suggest it is. 

Bottom line

A housing bubble in Canada seems clearly evident. Bet on the winners: residential REITs.  

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 Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Dividend Stocks

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »

how to save money
Dividend Stocks

Got $1,000? The 3 Best Canadian Stocks to Buy Right Now

If you're looking for some cash flow from your $1,000 investment, these are the ideal investments to make.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

A Dividend Giant I’d Buy Over BCE Stock Right Now

Don't get sucked in by BCE's 10% dividend -- the stock is a total yield trap. Buy this instead.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Consider Sienna Senior Living for a Stable Monthly Income

Buying this Canadian dividend stock could help you build a dependable monthly income portfolio for the long term.

Read more »

Female raising hands enjoying vacation, standing on background of blue cloudless sky.
Dividend Stocks

Best Beginner-Friendly Stocks to Buy Now in Canada

These top TSX stocks have delivered attractive long-term returns.

Read more »