BJK Financial Group Blog

As inflation continues to fall – to 2.5 % in July – economists expected to see the Bank of Canada (B0C) cut interest rates again to start off the month of September. They did. On Wednesday, the Bank of Canada announced another rate cut – the third since June.

And while it was generally expected, Governor Tiff Macklem also let Canadians know that the BoC would continue watching economic conditions in the months ahead and adjust rates as they deem necessary. That will be opportunities to see what the BoC is thinking twice more this year, in October and December.

Interest Rates React as Much as They Lead

As we hear again and again, the most significant tool monetary officials have for controlling inflation is the interest rate they set for banks and other financial institutions to follow. Up until Wednesday, the BoC Policy rate was sitting at 4.5%. Now it’s sitting at 4.25%

And to put that into perspective, the BoC Policy rate plummeted to .25% in late March of 2020 at the start of COVID and started to rise in 2022 to reach the kind of rates we are seeing now around the end of 2022.

Throughout that period, inflation rates fell to negative values in the first few months after COVID struck and then peaked in the summer of 2022. And as inflation rates skyrocketed, interest rates rose to try and tame it.

COVID was an economic as well as a health crisis for people around the world. While giving many of us an appreciation for the opportunity to work from home, it also devastated our ability to deliver products around the world. When things were at their worst we were all complaining about the double digit inflation we were seeing in the aisles of our local supermarkets. Now those prices have settled to a more acceptable rate of 2.1% in July.

The most disturbing part about the discussion of the inflation report by the BoC was the fact that the one sector still seeing relatively high inflation is what is referred to as the shelter price, still sitting at 5.7% for July, down from 6.3% in June.

That is not a good sign, considering how much time we spend talking about housing and the high cost of both buying and renting a place to live.

Rail Action Stemmed by the Federal Government

As we all know, it became difficult to get products delivered around the world during COVID. Last month it looked like we might see that happen once again as the railways locked out their workers. But in an effort to prevent that the federal government forced an end to the strike and sent the contract into binding arbitration. This has not been taken very well by the Teamsters and they have promised to take the government to court, claiming that the move by the Canada Industrial Relations Board set(s) a dangerous precedent that threatens workers' constitutional right to collective bargaining.

This is just one example of labour unrest that seems to be stemming from the aftermath of the COVID crisis we started out talking about. Airlines, both WestJet and Air Canada, have been in the news and I even came across a story about labour unrest at the Halifax harbour, earlier in August. I have no doubt there are many other examples.

And as Fall sets in, we can settle down

The passage of another Labour Day weekend and the return to school reminds us of the end of summer once again. And that passage often leads to renewal and re-evaluation. It is dropping interest rates or renewed school bells put you are in the mood for a review of your financial goals then feel free to reach out to discuss this or anything else in your financial plan. I would love to help. As usual, you can call me at (519) 279-0186 or send me a note at [email protected].

But while finding time for financial re-evaluations, keep in mind that you will need to also make for raking leaves, preparing for Thanksgiving, and digging your snow shovel out of the basement. (Oops, too early for that?)

This past week has been tough for investors, with significant declines across major indices like the Dow Jones Industrial Average (DJIA), the S&P/TSX Composite Index, and the Nasdaq Composite. Let's break down what happened, why it happened, and what opportunities might arise from these changes.

Market Performance

The Dow Jones Industrial Average (DJIA) experienced a notable drop of 2.67%, influenced by losses in several key companies. For instance, Intel saw a staggering decline of 26.06%, and other major players like Goldman Sachs and JPMorgan Chase also faced significant drops of 5.89% and 4.24%, respectively. This downturn affected not only individual stocks but also the overall market sentiment​ (markets.businessinsider.com)​​ (BNN Bloomberg)​.

Similarly, the S&P/TSX Composite Index, which represents the Canadian stock market, fell by 2.18%. This decline was broad-based, impacting various sectors within the index​ (TMX Money)​. The Nasdaq Composite, known for its heavy concentration in technology stocks, also suffered, reflecting a broader retreat in tech stocks which have been under pressure recently​ (TMX Money)​.

Causes of the Decline

Several factors contributed to this week's market declines. Here are the main reasons:

1. Earnings Reports: Many companies released their earnings reports this week, and the results were mixed. While some, like Bank of New York Mellon, reported better-than-expected results, others did not fare as well. Wells Fargo, for example, saw a 6% drop in its stock price due to a decline in net interest income, which overshadowed its revenue and earnings per share performance​ (Investopedia)​.
2. Economic Data: Macroeconomic indicators played a significant role. The yield on 10-year Treasury bonds remained high at around 4.18%, reflecting concerns about inflation and potential future interest rate hikes. Higher yields can dampen the attractiveness of stocks as an investment, leading to a sell-off​ (Investopedia)​.
3. Sector-Specific Issues: The technology sector, particularly within the Nasdaq, has been under pressure. The recent decline in large-cap tech stocks suggests a potential correction from previously high valuations. Additionally, ongoing challenges in the banking sector, influenced by higher deposit rates and competition for customer funds, have added to the overall market uncertainty​ (BNN Bloomberg)​.

Opportunities Amid the Decline

While market downturns can be unsettling, they also present opportunities, especially for long-term investors. Here are a few strategies to consider:

1. Buying Low: The principle of buying low and selling high is fundamental in investing. Market corrections can provide opportunities to purchase quality stocks at lower prices. For example, strong tech companies with temporary price declines could offer significant long-term value once the market stabilizes.
2. Diversification: Ensuring your portfolio is well-diversified can help mitigate risks during volatile periods. Diversifying across sectors, asset classes, and geographical regions can provide a buffer against specific market downturns.
3. Focus on Resilient Sectors: Certain sectors tend to be more resilient during market declines. Consumer staples, healthcare, and utilities often provide more stability compared to more volatile sectors like technology and financials. Stocks like Johnson & Johnson and McDonald's, which have shown relative stability, might be worth considering​ (markets.businessinsider.com)​.

Analyst Perspectives: Short-Term Correction or Systemic Issue?

Analysts are divided on whether this week's decline represents a short-term correction or a more systemic issue. Some believe the market is undergoing a necessary correction, especially in sectors that had seen inflated valuations. This perspective suggests that while the downturn is challenging, it may be temporary as markets adjust to more sustainable levels​ (TMX Money)​.

On the other hand, persistent inflation concerns and the Federal Reserve's potential future rate hikes could signal deeper issues. If inflation remains high and interest rates continue to rise, the market could face more prolonged challenges. The recent job growth slowdown and rising unemployment rates also add to the uncertainty, potentially prompting the Fed to consider rate cuts sooner rather than later​ (Investopedia)​.

Conclusion

Navigating this week's market downturn requires a balanced approach. While the declines in the Dow Jones, S&P/TSX, and Nasdaq reflect broader economic and sector-specific challenges, they also present opportunities for strategic investments. By focusing on diversification, resilient sectors, and long-term growth potential, investors can position themselves to weather the current volatility and benefit from future market recoveries.

When the federal government recently announced their changes to the capital gains tax a lot of stories popped up about how it would affect ownership of the family cottage. Because, almost by definition, it is not your primary place of residence, that family cottage you have owned forever will be subject to capital gains tax someday.

If you choose to sell your parents’ cottage while settling the estate, then figuring out capital gains is fairly straight forward – sale price minus cost. And cost is calculated as purchase price plus money spent on capital improvements. Any documentation you can provide for each of these items will help immensely.

All of that is also true if you keep the cottage in the family while settling the estate. You will need to get an assessment of the cottage’s fair market value (FMV) either through a real estate agent familiar with the marker or a licenced and certified appraiser.

And other time you sell your cottage you will need to work out the capital gains the same way you would if selling it for estate purposes.

But then, each case is different, so you need to talk to your tax advisor to know how best to proceed.

Going to the cottage – Do I or don’t I want to own a summer getaway

Along with all of the discussion about capital gains, there has been plenty of general discussion over the last couple of years about owning a cottage. The idea of working remotely that became so common during COVID triggered an active interest in cottage properties. And increasing mortgage rates had their own impact on the market as well.

Then this spring, the rise in the capital gain tax rate triggered a whole new series of conversations about selling and buying your cottage property. As long as you couln’t claim it as your primary residence, it was going to be considered for capital gains.

One more reason to look for good professional advice.

But maybe ownership isn’t the only way

It seems like most conversations about cottage life assume that you own that cozy log cabin by the lake. But it doesn’t have to. If you can only get away for a couple of weeks a year, then it may be much more sensible to rent.

Ownership takes time and money. Can you afford to buy your dream cabin and maintain it? Maintenance will require both time and money. Keep that in mind. You are taking on the responsibility of a second home. Along with the chance to have a place to get away from it all is the need to maintain that place too.

Another option could be joint ownership. Be careful of that and make sure you fully work out how to handle whatever chaos might come your way. And make sure you truly trust anyone else you are doing this with.

And we haven’t even talked about renting out your cottage in order to earning a bit of extra income…

There are lots of options. Pop open a cold one and take a moment before you just jump right in.

Summer is here. Let’s enjoy it no matter what

I hope I have given some useful things to think about as cottage season kicks into full gear. As part of your wider financial outlook, having a cottage as a second property has benefits as well as challenges. Feel free to reach out to discuss this or anything else in your financial plan. I would love to help. As usual, you can call me at (519) 279-0186 or send me a note at [email protected]

And above all else, have a happy summer.

The Bank of Canada (BoC) recently made headlines with its decision to cut the policy interest rate by 25 basis points, bringing it down to 4.75%. This move, announced on June 5, 2024, marks the first rate cut since March 2020 and has significant implications for the Canadian economy, particularly for borrowers and investors. As a financial advisor, I want to shed light on the reasons behind this decision, its immediate impacts, and the potential for further rate cuts in the near future.

Reasons Behind the Rate Cut

The primary driver for the BoC's rate cut is the significant cooling of inflation. Over the past year, Canada has witnessed a gradual decline in inflation from the decades-high levels seen in 2022. The BoC's aggressive monetary tightening during that period has played a crucial role in curbing inflationary pressures. Governor Tiff Macklem highlighted that the "considerable progress" made in taming inflation should be "welcome news" to Canadians, as it indicates that the central bank's efforts are bearing fruit (Bank of Canada) (Global News).

Economic data also supported the decision to cut rates. Canada's GDP growth for the first quarter of 2024 was weaker than expected, and the labor market has shown signs of loosening. These factors, combined with the global trend of central banks easing monetary policies, contributed to the BoC's confidence in reducing the policy rate without jeopardizing price stability (Global News).

Immediate Impacts on Borrowers

One of the most immediate and noticeable impacts of the rate cut is on borrowers, particularly homeowners with variable-rate mortgages and those with other types of debt tied to the central bank's policy rate. These borrowers will see their interest rates drop by 25 basis points, translating to lower monthly payments. For instance, a homeowner with a variable-rate mortgage of $650,000 on a $700,000 home would see their monthly payments decrease by approximately $100 (Global News).

This rate cut is a welcome relief for many Canadians who have endured higher borrowing costs during the BoC's tightening cycle. It provides much-needed breathing room for households, especially those with significant debt. However, it also presents a dilemma for prospective homebuyers and those renewing their mortgages. With variable-rate mortgages typically offering higher rates than fixed-rate options, the choice between the two becomes more complex. Borrowers need to carefully consider their expectations of future rate cuts and their financial situations before making a decision (Global News).

Potential for Further Rate Cuts

Looking ahead, there is a possibility of additional rate cuts by the BoC. Economists are divided on the timing, with some expecting another cut as early as July if inflation continues to cool. The BoC's next rate announcement is scheduled for July 24, and it will be accompanied by updated economic forecasts. If inflation and economic data continue to align with the BoC's targets, we could see further easing of monetary policy (Yahoo Finance).

However, the path forward is not without risks. The BoC is mindful of potential upward pressures on inflation from factors such as rising home prices and global economic uncertainties. Governor Macklem emphasized the need for caution, stating that the central bank would continue to monitor wage growth, inflation expectations, and corporate pricing behavior closely (Yahoo Finance).

Conclusion

The BoC's recent rate cut is a significant step towards supporting the Canadian economy amid a backdrop of cooling inflation and slower economic growth. For borrowers, this move offers some financial relief, but it also necessitates careful consideration of future financial decisions. As we await the BoC's next moves, staying informed and adapting strategies to the evolving economic landscape will be crucial.

For more detailed information, you can read the full article on the BoC's rate cut here.

By staying informed and making prudent financial decisions, we can navigate these changes effectively and take advantage of the opportunities they present.

Feel free to reach out if you have any questions or need personalized advice on how these changes might affect your financial plans.

Source: The Canadian Press. Published April 4, 2024.

The recent forecast by the Canada Mortgage and Housing Corp. (CMHC) predicting home prices reaching peak levels by next year and potentially setting new highs by 2026 has significant implications for families across Canada. As a financial advisor, it's essential to analyze the potential impact of these projections on family finances and provide insights into effective budget planning strategies.

Main Points:

Affordability Concerns: The CMHC report highlights affordability challenges in the home ownership market for the next three years. Despite a recent decline in home sales and prices, the forecasted decline in mortgage rates and robust population growth are expected to drive a rebound in home sales and prices. This could make it increasingly difficult for families to afford homeownership, especially in regions with high demand and limited supply. Families may need to reassess their budget priorities and consider alternative housing options to maintain financial stability.

Rental Market Dynamics: Despite an increase in rental housing supply projected for 2023, the CMHC suggests that supply may not keep pace with demand, leading to higher rents and lower vacancy rates. This could significantly impact families who rely on rental accommodation, as higher rental costs may strain their budget allocation. Families renting homes may need to anticipate potential rent increases and incorporate them into their long-term budget planning to ensure financial security.

Housing Starts and Construction Trends: The CMHC forecasts a decline in housing starts in Canada for the current year, with a potential recovery in 2025 and 2026. This reflects the lagged effect of higher interest rates on new construction. Understanding these trends is vital for families considering homeownership or investing in real estate. It implies potential delays in new construction projects, which could influence housing availability and prices in the future. Families planning to purchase newly constructed homes may need to adjust their timelines and expectations accordingly.

Impact on Family Finances and Budget Planning:

• Evaluate Housing Options: Families should carefully assess their housing needs and explore various housing options, including renting versus homeownership. Conducting thorough research on local housing market trends and affordability metrics can help families make informed decisions aligned with their financial goals.
• Budget Flexibility: Given the projected fluctuations in housing costs, maintaining a flexible budget is crucial for families to adapt to changing financial circumstances. Allocating a portion of the budget towards housing-related expenses, such as rent or mortgage payments, while also prioritizing savings and emergency funds, can provide a buffer against unexpected costs.
• Long-Term Financial Planning: Incorporating housing market projections into long-term financial planning is essential for families aiming to build wealth and achieve financial security. Consulting with a financial planner can help families develop comprehensive financial strategies tailored to their specific goals, risk tolerance, and market conditions.

In conclusion, the CMHC's report on projected home price peaks emphasizes the importance of proactive financial planning for families. By understanding the implications of these projections and implementing strategic budget planning measures, families can navigate the evolving housing market landscape with confidence and ensure their long-term financial well-being.