Image source: Getty Images
Canada’s housing market defied gravity during the pandemic and extended the price rally until 2022 when inflation caught up with it. Robert Kavcic, a senior economist at BMO Capital Markets, said the Bank of Canada’s 1% rate hike last week was a hammer that would trigger an even deeper correction in 2023.
Bidding wars have been replaced by price discounts in July 2022, as multiple interest rate increases begin to affect the real estate market. Real estate agents also note the rapid rise in delistings, which are houses for sale that were not able to attract buyers. The end of low-interest rates can be attributed to the rapid decline in home prices. Some have fallen as high as $200,000
Both good and evil
Jill Oudil, the chairman of the Canadian Real Estate Association (CREA), said “Activity continues to slow in the face of rising interest rates and uncertainty.” Based on data from CREA, the volume of home sales last month fell 5.6%. Notably, the average selling price has declined every month since February 2022.
Homebuyers have waited long to see home prices fall to a reasonable level. However, many are delaying buying due to rising interest rate. Nobody wants to be squeezed by higher mortgages. Homeowners whose variable rate mortgages expire next year have been feeling more anxious.
Harder qualification
Kavcic also stated that an increase in prime rates at commercial banks could make it more difficult to obtain a mortgage under current stress test rules. Effective July 14, 2022, the uniform prime rate of Canada’s Big Six banks is 4.70%. Prime rates are used to tie most loans, including variable mortgage rates, home equity loans (HELOC), auto loans and home equity lines of credit (HELOC).
The test now sets the qualifying interest rate for uninsured loans at 2% above the contract or 5.25%, depending on which is greater. Kavcic stated that the market will have to swallow the huge increase of 6% to be eligible. Kavcic says the drastic changes will impact purchasing power.
Resilient REITs
Two REITs are showing resilience and strong leasing activities in the midst of market chaos. Slate Grocery (TSX.SGR.U). H&R (TSX:HR.UN). The former pays a mouth-watering 7.93% dividend, while the latter’s yield is an attractive 4.38%. Both REITs offer alternatives to direct ownership and physical property.
Slate, a REIT worth $646.3 million, manages a portfolio of grocery-anchored real property in the United States. Blair Welch is the company’s CEO and boasts about how grocery real estate can be defended in any market. The Q1 2022 quarter saw an increase in rental revenue and net operating earnings (NOI) of 20% and 38.2% respectively, as compared to Q1 2021.
H&R has shifted its focus to higher-growth asset classes within strong urban markets in Canada. The REIT, which is a growth-oriented REIT, has a portfolio of high-quality commercial, industrial, residential and retail properties. Its assets total $3.6 billion. Net income increased 508.2% to $970million in Q1 2022 compared with Q1 2021. Both Slate Grocery ($10.90) and H&R ($12.54) trade below $15 per share.
The real estate sector is at -22.9% TSX’s Third-worst performing sector for the year. However, passive income streams can still be earned by investors who invest in REITs. You can do the same, but you should limit your choices to resilient REITs like Slate Grocery and H&R.