Is Canada’s Housing Market About to Change Course?

The boom in the Canadian housing market has really been unstoppable for years. But will the exuberance last?

| More on:

The boom in the Canadian housing market has really been unstoppable for years. The pandemic even accelerated the pace, making real estate one of the most desirable avenues for investors. However, the housing market can’t remain hot indefinitely and has to cool off at some point. The April 2021 data showed some dampening, resulting in an over 12% decline in home sales month over month. So, is this the start of a prolonged weakness? If so, what should prospective buyers do?

Canadian housing market in 2021

There are more supporting factors for the country’s housing market in the short term. Certainly, home prices have gone to the moon and affordability has taken a huge dent. However, as interest rates remain at record lows, the Canadian housing market could remain at elevated levels.

Notably, according to Canada Real Estate Association’s report, the home price index rose 2.4% in April month on month. This indicates a notable deceleration in prices compared to February and March 2021.

Many experts anticipate a steady increase in interest rates as inflation recently peaked to a decade-high amid the ongoing economic recovery. However, it could still be too soon to raise rates. The unemployment rate is still beyond 8% and we are not completely out of the pandemic yet. Raising interest rates during the half-baked recovery could hinder economic growth. We might see the Bank of Canada gradually raising rates in the second half of next year.

The central bank’s key policy rate is at 0.25% since last year. Notably, when housing markets last collapsed in 1990, mortgage rates were close to 13%, which is significantly higher than current levels.

Additionally, consumer sentiment should improve further later this year driven by mass vaccinations and overall economic recovery. The job market also should see significant progress in the next few quarters on the back of higher corporate investments. Whether this leads to higher demand for real estate or a return to offices post-pandemic remains to be seen.

Top stock to buy amid the roaring housing market

The strength in the Canadian housing market effectively seeped into related allied areas. One of the top mortgage lending companies, Home Capital Group (TSX:HCG) saw significant growth since last year. The stock has soared a handsome 85% since then. In Q1 2021, the company saw its per-share earnings surge 140% year over year. It had a total loan portfolio of $17.3 billion at the end of March 2021.

HCG stock could be an attractive bet for investors with an above-average risk appetite. The stock might continue to rally amid the expected strength in the housing market for the next few quarters. However, its volatile nature and relatively smaller size could keep conservative investors at bay.

Interestingly, HCG stock does not look too stretched from the valuation standpoint, as it trades around its all-time high. Its price-to-earnings ratio of close to eight times and price-to-book value ratio of 1 indicates room for further growth.

Bottom line

Although the recent housing market data indicated a tad softening, a huge downturn is highly unlikely. Interest rates will be the biggest driver, which we could see changing course next year.

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 Vineet Kulkarni has no position in any of the stocks mentioned.

More on Stocks for Beginners

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »