Views / How to roll: Canadian investment advice

How to protect yourself from the Canadian real estate bubble bust

You would think that Canada’s housing market was the champagne industry — there’s so much talk of bubbles. For the past couple of years it’s been bubble this and correction that. Yet the market keeps, well, bubbling up, at an annual rate of 4.4 per cent to the end of May 2014.

However, FitchRatings last week stated that Canada’s real estate market was 20 per cent overpriced, while the Morningstar rating agency predicted that a 30 per cent correction could happen over the next few years.

What can you do to protect yourself? Here are some suggestions:

Landlords: An easing in prices, combined with continued low interest rates, is a homebuyer’s perfect dream. A deep correction of more than 20 per cent is heaven itself. Should it come to pass, renters who are waiting and hoping for their chance at home sweet home will buy and the rental market will soften as vacancy rates climb. Landlords should stay on top of maintenance in order to keep their units as attractive as possible and stash cash just in case vacancy rates soar, leaving units empty.

Homeowners: Avoid a home equity line of credit because these are based on the property’s value and may be reduced or eliminated when the mortgage term is up. If you must borrow to pay for essential repairs, consider re-mortgaging now if fees and penalties are not significant.

Prospective buyers: Don’t. At least, not yet. Yes, if prices continue to defy the-sky-is-falling predictions, you may end up paying more. But having a bigger down payment could more than compensate and protect you from the impact of higher interest rates.

If real-estate money is burning a hole in your pocket, be a vicarious owner. Choose a low-fee exchange-traded fund (ETF) that tracks an index of Real Estate Investment Trusts (REITS) and is diversified among commercial, industrial and residential real estate.

My favourite REIT ETF is the BMO Equal Weight REIT (ZRE) because it is a little less concentrated in three of the biggest names: RioCan, Brookfield Office Properties Inc. and H&R REIT. The other two options are iShares S&P/TSX Capped REIT (XRE) and Vanguard FTSE Canadian Capped REIT (VRE).