Woman beside lake

If anything can be said of 2021 in British Columbia, it’s this: it was a year of extremes.

Vaccines allowed for an easing of pandemic restrictions on day-to-day life, consumer spending rebounded, and stock portfolios soared.

At the same time, the value of your home went up, but higher real estate prices shut thousands of first-time buyers out of the market. Rebounding consumer spending, combined with snarled supply chains and large doses of economic stimulus triggered a surge in inflation.  

And a barrage of fires and floods upended lives and livelihoods, putting climate change front of mind. It was a stormy year in BC.

As we prepare for the year’s end, it’s a good time to reflect on the events of 2021 and consider what they’ll mean for us in the year ahead.

1. Stock markets may still have room to rise, but gains could be muted

To say that 2021 was a good year for stocks would be an understatement. As of this writing, the Toronto Stock Exchange had gained 21% since the start of 2021, while the S&P 500 index has gained 25%.

COVID-19 will continue to largely dictate the markets’ direction in the next few months, but there are reasons to expect further gains, including continued low interest rates (see point No. 2 below), which may leave stocks as one of the few options available for those looking for returns that can potentially keep up with inflation.

Stock traders in office

At the same time, the Bank of Canada and federal and provincial governments have injected billions of dollars into the Canadian economy in the form of rock-bottom interest rates, a corporate-bond-buying program that was recently wound down by the central bank and direct payments to those who lost their jobs to COVID-19. Much of this money has ended up in Canadians’ bank accounts: according to Statistics Canada, the household savings rate hit 14.2% in the second quarter of 2021, compared to 2% in the fourth quarter of 2019, before COVID-19 started upending life around the globe.

In all, StatCan estimates that households saved more than $250 billion in cash in the year and a half leading up to September 2021, and it’s likely a portion of this money will flow into stocks, especially as rising inflation erodes the buying power of cash.

But with strong gains in the major indices since the pandemic-driven crash in March 2020 (with the TSX up 58% since then and the S&P 500 having more than doubled), investors will likely be more cautious and selective, which could lead to more muted returns in 2022.

2. Central banks: Caught between inflation and a rebounding economy

Central banks also find themselves in a dilemma as we enter 2022. Remove stimulus too quickly and they risk derailing the recovery. Go too slowly and they risk stoking inflation. Where central banks around the world – and most importantly for us the Bank of Canada – draw the line will be one of the biggest economic stories of the year.

South of the border, Federal Reserve Chair Jerome Powell has said this “transitory” bout of inflation is, largely the result of shortages arising from consumers’ shift to buying products – everything from fitness equipment to lumber – and away from services, such as travel. As spending patterns rebalance, the thinking goes, inflation will ease.

However, there are signs that inflation may be stickier than central bankers would like. For one, it’s been steadily increasing all year, from a 1% year-over-year rise in the consumer price index (CPI) in Canada in January to a 4.7% jump in October, according to statistics-tracking website Trading Economics.

In 2022, our attention will be on wage inflation, with salaries having climbed 4.6%, on a fixed-weighted average (which controls for the changes the job scene has undergone during the pandemic) in September 2021 compared to the pre-pandemic days of September 2019, according to Statistics Canada. A September 2021 survey by human resources firm Lifeworks forecasts a 2.7% rise in pay during the year.

Rising prices and rising wages form a vicious circle, with higher prices encouraging workers to demand more money, which again pushes up prices. Rising wages also suggest that today’s inflation goes beyond burdened supply chains.

That’s one issue the Bank of Canada has to deal with. The other is the debt that households, businesses, governments and consumers have taken on during the pandemic. The red-hot housing market, for example (more on that below), has driven the average value of newly originated mortgages up to $365,860 in the third quarter of 2021 from $271,200 five years earlier, according to the Canada Mortgage and Housing Corporation.

The good news is that the Bank of Canada has some room to move on the interest-rate front. With its overnight lending rate at 0.25%, it could bring in six quarter-point increases before reaching the pre-pandemic (and also historically low) February 2020 level of 1.75%.

3. Real estate: Governments could be key players

Homes in lower mainland

The real estate market these days is a story of supply, demand, and increasing prices. The Real Estate Board of Greater Vancouver (REBGV) reports that home sales remain healthy across the region, but the pool of homes available for sale has been in decline. The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 35.7% less compared to November 2020. This is having an impact on rising home prices – a trend being experienced across the country. In Metro Vancouver, the average price of a home in October 2021 rose to $1,199,200, up 14.7% from a year ago and 1.1% from September 2021.

So what might the market deliver in 2022? While a lack of supply is a long-term problem, it should start to normalize as the economic reopening draws money back to the services side of the economy – feeding the pent-up demand for travel and entertainment, for example (depending on the path of the pandemic, of course).

The key item we’ll be watching is if policymakers decide to step in, will home prices continue to soar. We’ve already seen several policies in recent years aimed at controlling prices, such as a foreign buyers’ tax; taxes on vacant homes (both provincial and a separate Vancouver-only tax); and taxes aimed at curbing property speculation.

There is also the likelihood of another increase in the federal government’s “stress test,” which forces buyers to prove they can handle an interest rate that’s 2% higher than their offered mortgage rate or 5.25%, whichever is higher. The benchmark has already been raised once this year, from 4.79%, as of June 1.

The key takeaway for homeowners (and homebuyers) is to keep an eye on government moves in the real estate market, because they could affect your retirement plans, depending on how much they dampen price increases.

4. Climate risk gets a higher profile

One thing we can anticipate is that investors in BC will be much more sensitive to the risk of climate change after this year of fires and floods. In real estate, that will mean accounting for things we never considered before, such as a property’s distance above sea level, whether it’s on an existing flood plain or if it’s close to dense forest.

For stocks, expect a greater focus on ESG (environmental, social and governance), in which investors will put more weight on these factors in relation to the traditional measures of corporate earnings, dividends and share-price gains.

Your best strategy for 2022? Stick with the fundamentals

No matter what 2022 brings, it’s important to keep in mind that following the proven fundamentals of investing – such as building a portfolio of assets that’s diversified and suitable for your risk appetite and age – is still your best course. An advisor can help you build a plan that’s right for you and adjust according to your needs and changes in the economy. Make an appointment with them to take a look at what 2022 could mean for you and your finances.

BlueShore Financial, Financial Advisor, Becky Bouzhmehrani

Becky Bouzhmehrani

Financial Advisor

Have a question? Ask an expert

Our team of experienced professionals are here to answer any questions you may have.

Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

The information contained in this article/video was written by BlueShore Financial or one of our expert financial writers and was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal financial advice.