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Highlights
- Average house price was at peak in March 2021, and so is inflation rising in Canada
- High prices of most things can compel the central bank to raise rates, making mortgage costlier
- The Capped REIT Index has given 42 per cent return over past one year
Canada is not an isolated economy. The real estate market touched new records not only in Canada but also in the US, the UK, Australia and other developed economies.
This hints toward more or less similar changes in the coming days in all these economies when central banks, including the Fed and the Bank of Canada, start raising interest rates coupled with QE tapering by purchasing lesser bonds or even resorting to Quantitative Tightening (QE), if need be.
Cheaper mortgage set the sector on fire
The most evident result of near-zero benchmark rates in all the economies was cheap mortgage loan.
How Canada’s commercial and housing real estate may look in 2022?
Accommodative stance in the wake of economic downturn triggered by the pandemic fueled speculations that mortgage is cheap and this is the best time to invest in a real estate asset. Unprecedented stimulus by the federal governments in most economies also added fire and property rates defied all pandemic odds.
Also read: How are low interest rates helping Canada & US?
High inflation is a cause of worry
A correction may impact the commercial as well as housing real estate in all economies. This correction will be preceded by rate hikes and QE tapering that the Bank of Canada will have to unwillingly resort to in the wake of record-high inflation. The central bank has accepted that low rates triggered buying frenzy in real estate. And this could be one of the reasons why central banks might suck liquidity earlier-than-expected.
Also read: 2 real estate stocks to buy as Toronto housing market heats up
That said, this correction might not push much pressure and prices might still hover around the new peaks even in 2022. No big crash is likely given the economy is heading back to pre-pandemic macroeconomic levels, and sellers would be hesitant to sell their assets at a lower price. The latter aspect might, however, trigger a little stagnation in the real estate sector, but price crash is unlikely.
S&P/TSX Capped REIT Index
Capped REIT Index is made up of real estate income trusts. The term ‘capped’ in the name means that the relative weight of each constituent stock is capped at 25 per cent.
The Canadian Apartment Properties Real Estate Investment Trust and the RioCan Real Estate Investment Trust are two of the biggest constituents. The two have a market cap of over C$10 billion and C$7 billion respectively.
The YTD return of the S&P/TSX Capped REIT Index is nearly 28 per cent. The 1-year return is nearly 42 per cent. The recent surge in the Canadian real estate sector contributed heavily to the YTD and 1-year return of the index.
Bottom line
A number of factors are at play in the real estate sector. All over the world, the past one and a half year was a time of frenzy in housing prices and sales volume. Low mortgage rates encouraged buyers. But the rising inflation can now compel the Bank of Canada and other central banks to rein in liquidity. This can make borrowing costlier. However, the recent high gains are not likely to be erased in the near-to-medium term, and hence real estate stocks might gain some more value.
