Just like stocks, when it comes to real estate, things can change in a hurry.
There has been a lot of discussion over the past year about the residential real estate market in Canada, specifically the potential “housing bubble” in Vancouver and the Greater Toronto Area. Real estate activity can play a significant part in overall market performance.
Should Canada experience a US-style housing crash or even a milder market correction, it’s likely to impact the underlying economy and as a consequence Canada’s equity markets. Construction is a significant component of our economy. In fact, nearly eight percent of employed Canadians work in the construction industry. That’s high by historical standards and relative to other developed economies. On top of that, when the value of our houses declines, we feel less confident and we spend less. Higher unemployment and a lack of consumer confidence results in a slower economy.
So how can Canadians best protect their portfolios from a potential downturn in housing values? The answer may be as simple as exposing their portfolios to a greater weighting of US and international stocks. This can be achieved in two ways – first, investing in foreign stocks directly, or second, moving into Canadian stocks with substantial overseas operations.
We may not be in the midst of a housing bubble, only time will tell, but keeping an eye on the real estate market and diversifying equities by region is always a smart idea.