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Housing Market: A More Than 20% Price Drop or 40% Crash Is Possible

Caution, careful
Caution, careful

Written by Christopher Liew, CFA at The Motley Fool Canada

Home price growth could decline a little after the Bank of Canada’s (BoC) second rate hike. The key interest rate is now 1%, following the 50-basis-point increase on April 13, 2022. However, if four or more hikes are still coming until the year-end, prices might finally drop tremendously.

BoC will also end reinvestment and begin quantitative tightening on April 25, 2022. Because the central bank won’t replace maturing Government of Canada bonds anymore, expect its balance sheet to decline over time. Furthermore, BoC forecasts the economy to grow by 4.25% this year and then slide to 3.25% and 2.25% in 2023 and 2024, respectively.

Assuming the BoC increases its rates six times more (0.25% per hike) in 2022, the benchmark will climb to 2.5%. According to David Doyle, Macquarie Group Head of Economics, the 1.5% increase from April is a headwind for housing activities.

While the housing market contributes significantly to overall economic activity, the BoC had to act aggressively. Besides the increasing risk, the feds warn that inflation could remain well above its 2% target throughout this year. The policymakers expect more normal levels to return in 2024.

Price drop or market crash

Oxford Economics forecasts home prices in Canada to fall 24% by mid-2024. Among the factors that could drive prices down are higher interest rates, a foreign ban on ownership, and anti-speculation policies.

The global forecasting firm said prices could rise further if the above measures fail. More worrisome is that a 40% crash could follow the unsustainable climb and lead to a financial crisis. However, the firm believes that a more than 20% price drop is more likely than a severe correction.

A major problem today is the market imbalance, as demand outpaces supply. Oxford said home prices will not bounce back after the 24% decline in 2024, although it expects the trend could reverse. The firm sees supply outpacing demand from 2025 to 2023. If annual growth is below 1% for five years, incomes should catch up, and affordability could return by mid-2028.

REITs over direct ownership

Bloomberg reported that real estate investors or buyers of second homes own nearly one-third of the supply in the country’s biggest housing markets. Statistics Canada said this group creates more competition. However, investors who want exposure to the real estate sector have alternatives to direct ownership.

Real estate investment trusts (REITs) can provide rental-like income at a lower cash outlay. The high-yield real estate stocks today are NorthWest Healthcare Properties (TSX:NWH.UN) and True North Commercial (TSX:TNT.UN). The former is the only REIT in the cure sector, while the latter boasts a solid tenant base.

NorthWest owns and operates medical office buildings, hospitals, and clinics globally. At $13.75 per share, this $3.27 billion REIT pays a juicy 5.82% dividend. On the other hand, the federal and provincial governments are among the anchor tenants in True North’s 46 high-quality commercial properties. The share price is only $7.01, but the $643 million REIT offers a mouth-watering 8.47% dividend.

Poor affordability to remain

Prospective homebuyers are likely disappointed by Oxford Economics’s forecast. Besides the affordability crisis not ending anytime soon, mortgages will get bigger, as interest rates increase. Meanwhile, a national report by Rentals.ca shows that cost of rent is climbing, too.

The post Housing Market: A More Than 20% Price Drop or 40% Crash Is Possible appeared first on The Motley Fool Canada.

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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