Those of you who are regular readers know that I’m not positive about the outlook of Canada’s real estate market. I’m not sure I’m willing to go as far as to say we’re in a bubble, but I am willing to say the market is poised for a downturn. Prices have done too well for too long. Interest rates are at record low rates. Debt levels are the highest in history.
If you share the same opinion as I do, then how do you make money from the downfall?
The easiest solution is to sell your real estate. Have rental properties that have skyrocketed in value? Looking to downgrade anyway? Then what are you waiting for? Selling right now to lock in profits would be a great move to make in this market.
How about those of us who are very happy in their homes with no intention of selling anytime soon? How do they make money on the fall?
Canada has a healthy REIT (Real Estate Investment Trust) market. The ETF tracking all of them is trading at a 52 week high, up around 50% from it’s lows. Shorting it would be a quick way to bet against the real estate market.
There are a couple problems with the strategy. First of all, a lot of the companies that make up the ETF own American real estate. It isn’t a true proxy of the Canadian market. The other problem is that when you short a stock, you’re responsible for paying the dividend to the people you’ve borrowed the stock from. The ETF currently yields over 5%.
Along the same lines, option 2 would be to short the Canadian banks. Since they keep a large amount of the mortgages they underwrite on their own balance sheets, their share prices would go down with any housing correction.
Canada’s banks would be better insulated than our American cousins, since such a large percentage of our mortgages are directly insured by our government. Barring a huge U.S. style meltdown, the government will just step in and foot the bill.
How about shorting the Canadian dollar then? A downturn in our real estate market can’t be a positive for our buck. The Loonie is trading right around parity with the U.S. dollar, putting it at levels that are close to the highs of late 2007. This strategy, combined with some improvement from the American greenback, could be profitable providing the rest of Canada’s economy struggles with the housing downturn. With all the natural resources Canada has, we’d need to also see a correction in the commodity markets.
Or, you could just hunker down, not buy any real estate you can’t easily afford, make smart financial decisions, and call it a day. That’s the strategy I’ll probably end up going with.