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Canada is facing a housing market crash. Home prices in major cities such as Toronto and Vancouver have already started to decline this year. According to some experts, prices could collapse much more by 2023.
The continued collapse of the housing market is likely to have a serious impact on the Canadian economy and blue-chip stocks. However, the crash could also create opportunities for long-term investors looking to profit.
Here’s a closer look
Canada’s Housing Market Crash
By all traditional measures, Canada’s housing market is overvalued. The typical home in Toronto costs 10 times the average family income. In Vancouver, the ratio is closer to 12. Nationwide, families will need more than a decade of savings to make a down payment on a typical home.
These ratios indicate that the market is overvalued and artificially inflated. This has been made possible by record low interest rates and loose lending standards over the past decade. In 2022, this trend reverses. The Bank of Canada has been rapidly raising interest rates, pushing the typical five-year mortgage rate above 5%. That’s up from about 3% last year.
Tighter lending leads to lower house prices. This is bad news because over 10% of Canada’s economic activity is directed towards real estate. This includes repairs, purchases, leasing and brokerage. If you include mortgage lending, the ratio is much higher.
Simply put, the collapse of the housing market threatens to trigger a recession in Canada. Investors should navigate this environment carefully.
Stocks to avoid
Real estate investment trusts (REITs) may be exposed to this adjustment. Residential landlords like Minto Apartment REIT (TSX:MI.UN) could see some erosion in their book value from this decline. The stock has already lost 31.5% of its market value since the start of 2022.
Minto REIT and its peers could see some upside from rising rents. Rent growth could stall, however, if the economy goes into recession and unemployment rises. Residential landlords may also come under pressure from rising interest rates, which make their borrowing capital more expensive.
Aside from REITs, investors should probably avoid alternative lenders and banks that have excessive exposure to domestic mortgages.
Shares to buy
You can bet on solid assets with stable dividends without exposing yourself to Canada’s vulnerable housing market. Infrastructure trusts like Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP) are a good example. The company owns critical infrastructure such as toll roads in Brazil, telecommunications towers in France and a rail operator in the US
The value of these core pieces of infrastructure is relatively recession-proof. In fact, the value is constantly increasing over time. Brookfield Infrastructure stock has returned 621% since 2009 – a compound annual growth rate of 15% over 13 years.
The stock currently offers a 3.5% dividend yield. I expect the company’s cash flow growth to outpace inflation. That makes BIP stock a better bet for investors looking to generate passive income despite the housing bust.
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