Let’s talk about 2023.
We’re barrelling into a brand new year and just like every year before it, the pressure to set big goals and make big change is strong. But unlike other years we are going into 2023 with a ton of financial and economic uncertainty that’s left most of us wondering what the best path forward will be.
Here are a few things that we think you should know - what to keep your eye on, headlines to disregard, and plans to put in place so that you can best weather whatever the year throws at us and ultimately come out on top.
Leaving 2022 behind
A recent survey found that about a third of Canadians felt that 2022 was worse than 2021, so it’s safe to say that the sentiment at the end of this year isn’t great. A year of record high inflation and a record SEVEN hikes to the Bank of Canada’s overnight rate has left just about everyone in the country financially reeling. Variable rate mortgage payments increased by as much as $1400 per month, property values dropped by about 15% nationally and rents continue to sky rocket in just about every urban centre. Coupled with what seems like an endless barrage of clickbait headlines meant to stoke fear it’s no wonder that Canadians are not feeling fantastic about either the year we just left behind or the year we have ahead of us.
However, it’s important to keep a few positives in mind while reflecting on the year gone by. First, remember that the decrease to property values is, in fact, a correction to an artificially inflated market that ballooned as a result of the pandemic. During its peak, the market was teetering dangerously on the edge of overblown, many buyers were finding themselves scrambling to find a property and making potentially dangerous choices as a result (ie: making condition-free offers), and many still were unable to find a property at all. As the market cools, we are seeing balance return to the market which is allowing buyers to make more conscious decisions, putting more negotiating power back in their hands, and keeping more inventory on the market for longer. Also, note that despite doom and gloom forecasts of a recession ahead, the labour market in Canada is still doing wonderfully. Will it cool down into the later part of 2023 as a result of continued pressure on inflation? Likely. However, most expert economists are predicting only a technical recession, defined as two consecutive quarters of negative real GDP growth - not as the archetypal “crash” we’ve been seasoned to expect.
Leaving this year behind us, it seems the best thing we can do is keep a careful eye on our household budgets, reign in our unnecessary spending, ensure our mortgage payments are comfortable and make the best financial choices for our families.
New year, new rules
There are a few changes that have either started in recent months or will be kicking off in the new year which will ultimately affect your financial decision making:
Sagen’s Default Management Protection
One of Canada’s largest mortgage ensurers has made changes to its borrower protection policy, allowing homeowners to extend their amortization to 40 years.
This will spread outstanding principal repayment over a longer period, therefor lowering monthly payments.
This is available to variable/adjustable rate mortgage holders who will be burdened by increasing payments or are coming up on their trigger rate, or to any mortgage holders coming up for renewal and unable to meet payment requirements at current amortization.
Foreign Buyers’ Ban
Banning foreign investment in the Canadian real estate market has been on the radar for some time now, but the ban (announced in April but with final details announced just last week) takes effect starting January 1st.
The ban prohibits non-Canadians from purchasing residential property for two years but has some exceptions including:
Canadian citizens and permanent residents, some international students (must purchase property for under $500k and have spend the majority of the last 5 years in Canada), and workers who have filed Canadian tax returns for at least the last 3 out of 4 years
Foreign nationals with temporary resident status, including people fleeing conflict, and refugees
Buildings containing more than 3 dwellings and recreational properties (cabins, cottages etc)
The ban is still presenting some questions around who will be affected so, if you think this may affect you please reach out ASAP so we can determine the best course of action!
The Stress Test
As a refresher the current mortgage stress test parameters are:
Buyers must qualify at the greater of the qualifying rate of 5.25% or the posted rate +2%
With rates going above 5%, this means that most buyers this winter must qualify at a rate of 7% or more
This has contributed to pricing many buyers out of the market as higher qualifying rates mean a lower mortgage amount
OSFI stated in December that it does not consider the test a to be a tool for managing housing supply and that, with so much uncertainty remaining in the market, it is prudent to continue to test buyers for possibly adverse conditions.
Budgeting during a downturn
The last thing anyone wants to think about the week following Christmas is their budget goals but with a recession already showing signs of starting into the first quarter of 2023, there is no better time than right now to take a look at your spending. We put together a post this fall that gave a ton of great tips for budgeting overall. You can check that out below.
While you spend time reflecting this week, we recommend you sit down with a hot cup of coffee (maybe with some leftover holiday Bailey’s) and take account of your current finances. Look at your current household income streams as well as your monthly expenditures. Before you can realistically budget and set goals, you have to know where you are starting from. From there, you can start to create your household budget. Here are a few tips to keep in mind:
Be realistic - Set your budget based on your current income, and don’t undershoot. It is better to give yourself enough cash to cover each category and have some left over each month than to aim low and end up overspending, which is always discouraging
View your money as a tool - Instead of obsessing over every dollar and depriving yourself out of fear, try to focus on the positive outcome of your savings. Focusing on the why instead of just the how makes budgeting more palatable and most often, more successful.
Focus on an emergency fund - A good rule of thumb when budgeting is to allocate 50% to needs, 30% to wants and 20% to savings/debt. In this first part of 2023, consider allocating a bit more to the third category and focusing on paying down high interest debts and saving about 6 months of expenses, just in case.
If you’re feeling like you could use a reset for the new year, or need some ideas to get you through this period of decline - reach out. Our team is always happy to help you get a handle on your finances so that you can come out on top!
