Are real estate stocks a good investment in Canada?

Canada’s real estate market is one of the hottest ones around the world right now. Low interest rates have encouraged more Canadians to look for new homes, and with the supply gradually shrinking, home prices have been surging significantly.

Analysts believe that there have been some signs of moderation in the housing bubble recently. But even with the Bank of Canada looking into tweaking the rates in the near future, the market is expected to remain hot for a while.

Let’s dive in to study whether it is a good idea to invest in the Canadian real estate market right now as experts continue to dub it as a ‘housing bubble’.

Is real estate a good investment? 

Real estate investment in Canada does not have a common starting point for all investors. While some choose to buy property to occupy it, a significant portion of the population looks at it as an investment.

Apart from lowered interest rates aimed to spur consumption in a slowing economy, demand from homebuyers also shot up as people felt the need for bigger homes amid extended stay-at-home restrictions.

This demand surge was observed particularly in large urban centers, including Toronto, Vancouver, Ottawa and Montreal. These comprise nearly 50 per cent of the total residential housing demand in Canada. The demand reportedly led to a 23 per cent year-over-year (YoY) increase in housing price in April 2021.

Copyright © 2021 Kalkine Media

Reports also suggest that Canadian homebuyers find themselves priced out of the housing market seeing the stiff demand-supply dynamic, which has kept the prices elevated for home occupiers.

However, figures by the Canadian Real Estate Association (CREA) highlight a slight shift in this trend recently.

The association reported that housing sales declined 7.4 per cent month-over-month (MoM) in May, while the number of newly listed properties was down 6.4 per cent from April to May.

The real estate association notes that this moderation may be due to increasing fatigue among buyers, who may now not be willing to lock deals at higher prices. This shift could also be attributed to the stage of the pandemic Canada is in.

The third wave of the pandemic and improving immunization numbers suggest that the restrictions on movement may not be prolonged.

Understanding these trends, let us see what the scenario could be going forward.

What needs to be observed in the Canadian housing market?

Seeing this gradual moderation in overall demand, experts suggest that it is key to observe the central bank’s stance on interest rates.

A cooling demand and a subsequently improving supply could augur well for homebuyers at current interest rate levels, as affordability of housing may improve. Any increase in interest rates, however, may put a pressure on affordability of residential real estate going forward.

Some analysts believe that even a marginal increase in interest rates, say, a 25 to 30 basis point hike, could hit affordability.

On the other hand, even as interest rates are tweaked to check the heat in the housing market, prices may not cool off just as quickly, some analysts pointed.

A cut in prices for real estate is generally triggered by a sharp decline in demand, or an oversupply of property. Experts, therefore, believe that price correction currently looks distant in the Canadian market as these conditions may not be perfectly met even as restrictions are lifted.

It is also key to observe the participation of investors in the housing market. The continued demand from those looking at real estate as an investment option is likely to keep housing prices elevated. These investors reportedly comprise nearly one-fifth of the total demand for residential real estate.

Some also believe that the reopening of international borders to allow immigrant settlement in the country could also add to the pricing pressure.

Now that we have looked at its prospects going forward, let’s understand how have Canadian real estate companies performed amid the pandemic.

Performance of real estate players in Canada amid the pandemic

The S&P/TSX Capped real estate index, which comprises both commercial and residential real estate players, grew 21.33 per cent in the year-to-date (YTD) period.

The S&P/TSX Composite Index, considered Canada’s benchmark index, rose about 15.87 per cent in the same period.

A report suggests that the development of real estate properties in Canada was about seven per cent higher in December 2020, as compared to pre-pandemic levels. The construction of non-residential buildings, however, was about 11.2 per cent lower YoY, and engineering and construction activities were about 12.8 per cent lower as against the pre-COVID levels.

Morguard Corporation (TSX:MRC), a TSX-listed real estate player with a diversified portfolio of residential and commercial properties, reported a higher vacancy in residential properties in its latest quarter earnings report. Stable occupancy in residential as well as retail properties is said to have helped the company generate healthy cash flows.

Its funds from operations were at C$ 44.4 million in the first quarter that ended on March 31, 2021, as against that of C$ 7 million in Q1 2020.

It said that Morguard’s net operating income declined 12 per cent to C$ 2.2 million in Q1 2021, following a decrease in its Canadian residential portfolio on the back of rising vacancy levels. As restrictions on movement increased in Canada following the third wave of the virus, demand for rental housing reduced substantially.

While Tricon Residential Inc. (TSX:TCN), a C$ 3-billion market cap company operating in the rental housing segment in the US and Canada, saw its net income grow substantially in Q1 2021. It reported a net income of US$ 41.9 million, as against a loss of US$ 46.5 million in Q1 2020.

Its funds from operations were 30 per cent higher YoY in the latest quarter. It also announced a joint venture with Canada Pension Plan Investment Board, wherein the company is expected to invest about C$ 500 million to build rental housing in Toronto.

The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.