The past year in personal finance has been like watching the events of a normal decade or two played at high speed.
So much drama in such a short period. The worst inflation in decades, soaring house prices, a flaming-hot stock market and a growing acceptance of cryptocurrency, even as it bounced around in price. We’ve also seen economic misfortune, including a surge in the usage of food banks and the worst housing affordability in 31 years, according to RBC Economics.
A calmer year in 2022 would be most welcome, but don’t count on it. Here are the numbers that determine how it all turns out:
Prices grew at a rate of 4.7 per cent compared with a year earlier in October and November, the highest inflation readings since February, 2003. Inflation takes a blowtorch to your household finances, forcing you to spend more to buy the same old things. Interest-rate increases are expected as soon as the spring, and this could dampen some of the heightened demand we’re seeing for goods and services. Supply chain disruptions caused by the pandemic will also have to ease for inflation to decline.
You’re most vulnerable to inflation if you’re a senior relying on conservative investments such as term deposits, or if you work at a job where pay is rising modestly or not at all.
A sure sign that inflation is settling in is employers offering higher wage increases. Wages (as reported in monthly employment reports from Statistics Canada) suggest this is already happening. The forecasters at Capital Economics say there’s a strong chance that wage growth will exceed 3 per cent annually by the end of the first quarter of next year, up from a late-2021 level of 2.2 per cent.
With inflation as high as it is, a wage increase in the 3-per-cent range still leaves you poorer. But it’s enough to add some urgency to the Bank of Canada’s thinking about inflation and the timing of interest-rate increases.
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Bank of Canada overnight rate
This benchmark rate for lines of credit, variable-rate mortgages and floating-rate loans plunged to 0.25 per cent from 1.75 per cent in just over three weeks when the pandemic flared in March, 2020. Barring economic damage from the Omicron COVID-19 variant, expect the Bank of Canada to start cranking the overnight rate higher in increments of 0.25 of a percentage point starting as early as this coming spring or summer.
If you have a home equity line of credit, each rate increase will raise the amount of your minimum monthly payment. Variable-rate mortgage payments may not be adjusted higher; instead you may find that more of your payments go to interest and less to repaying principal. You will end up paying off your mortgage more slowly than expected.
Five-year Government of Canada bond yield
The interest rate paid by the federal government on bonds maturing in five years helps set rates on five-year fixed-rate mortgages. The five-year Canada bond yield surged through most of 2021, then took a step back late in the year as a result of concerns about the Omicron variant.
Expect five-year bond yields to rise in 2022, as soon as it becomes clear the economy is improving and inflation needs to be addressed. If mortgage rates move higher as well, expect increased monthly payments for people buying first homes, and higher renewal costs for many existing owners.
The wealth divide between homeowners and those who want to get into the market will likely widen in 2022. In projecting a 21.2-per-cent rise in the national average resale home prices for 2021, the Canadian Real Estate Association included a forecast that prices would rise a further 7.6 per cent in 2022 to around $739,500.
Rising mortgage rates may help slow price increases, but the catch is that the cost of financing the purchase of a house or condo rises.
Market strategists seem optimistic that stocks will rise in 2022 as the economy returns to normal levels of activity, Omicron permitting. But, wow, have stocks ever come a long way since the crash of March, 2020, triggered by the pandemic. Globeinvestor.com shows a 76-per-cent increase for the S&P/TSX Composite Index since mid-March, 2020, and a 100-per-cent gain for the S&P 500.
Momentum will fade at some point, which means there will be less enthusiasm for the kind of speculative stocks and sector investments that have paid off so well in the past 18 months. Taking some profits on these gains could give you a head start on a positive personal finance scorecard in 2022.
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