2020 might be a year to forget for many people. This isn’t a blog to talk about health and viruses, nor is it a blog that focuses on social issues and politics. So I’ll stick to the personal finance matters instead for 2020. From a personal finance standpoint there are many polarizing views on what 2020 brought us so let’s look at the biggest highlights.
We couldn’t write about 2020 without talking about the virus. Yes, the virus. We’re all fatigued reading or hearing about Covid-19, but it was the dominating story that turned the world upside down and changed the way we lived forever. Well… perhaps.
The early drastic responses that governments enacted when Covid-19 first hit the shores of North America were pretty draconian to many people, but necessary to avoid the panic and fear that might ensue from an unknown virus.
This led to many initiatives from the Federal government of Canada including, maybe for the first time ever, the handing out of billions of dollars to ordinary Canadians. And boy, did Canadians take advantage. Records show that nearly 9 million Canadians applied for CERB.
The $2000 a month payout was so popular that many Canadians took advantage of the $12,000 stipend to boost their savings and save for a rainy day. Many took the money even when they shouldn’t have. They probably landed on Santa’s naughty list, or worse the CRAs. Some recipients actually increased their earnings versus what they might have received working. Though these individuals may be surprised to learn that the CERB payment is a taxable benefit.
When the dust settled, the CERB program cost the Government of Canada almost $80 billion dollars. That was nearly a quarter of the 2019 annual budget of $355 billion. This kind of government stimulus is bound to have a profound impact on the economy, but will also have ramifications in the future that we have yet to see.
Many Canadians got a free lunch from the Canadian government, but perhaps the biggest benefit was given to home owners. In what could be unfathomable to many, the major banks and financial institutions, under the guidance of the Federal government, allowed millions of home owners to defer their mortgages for 6 months or longer.
This is probably unheard of and perhaps a sign of how important the real estate industry is to Canada. In normal times, those that couldn’t pay their mortgages would have to default on their homes and sell them, but during the hard times of Covid-19 lockdowns, many banks elected to defer mortgage payments for home owners that applied.
It could be said that many people deferred their mortgages due to lost wages or temporary unemployment, but this was not necessary the case. Many who were on the brink of financial disaster, but still had paying jobs were also able to defer their mortgages. This gave many Canadians a new lease on life. Not having to pay for living costs for 6 months meant Canadians could keep their money and pay off other debt. They could save the money and establish an emergency fund. The 6 months was enough time for some Canadians to right their financial mess.
If there is anything that this has taught us, it’s that Canada’s housing market is too big to fail. Despite poor financial management from individuals, the government and the banks will not let the real estate market fall or fail.
The Haves And Have Nots
If there is anything that the Covid-19 pandemic has exposed, it’s the giant financial gap between the haves and the have nots. For those that can continue to work from home and whose jobs are not affected by the government lockdowns, they continue to prosper. For those who’s livelihood depends on retail, hospitality or in person services, they continue to struggle.
Perhaps it’s what economists call a K-shape recovery rather than a V-shape recovery. Not everyone is feeling the benefits of the CERB payments, lower interest rates or rising home prices. In fact, it’s been more polarizing than ever.
Those with homes and working from them, don’t mind this arrangement. In fact, the whole work from home arrangement and lack of social activities outside the home has led to an increase in savings and better financial predicament.
Those who are unable to work, unable to perform their services and lack assets have appreciated drastically during the pandemic have fallen deeper into the financial abyss. Despite the increase in net worth for Canadians during 2020, there are more homeless people than ever, more people getting evicted and more people visiting food banks.
These are the challenges that Canadians will continue to face. If the conditions of the pandemic become the new norm, what do people, who have worked their whole life in retail and hospitality, do? Can someone who was a cashier become a software developer overnight? Can a hotel cleaner turn around and become an accountant?
Even Cheaper Money
Last year mortgage rates reached a magical 2.00%. It was a rate that I thought could never go lower, but boy could I ever be wrong. The lowest mortgage rate from a large financial institution can now be had for under 1.00%. Yes, that’s right! HSBC has been advertising their 0.99% rate for a while now. It’s the lowest ever seen, but can it go lower? Maybe.
I no longer doubt that interest rates could continue to fall despite the many “experts” and economists out there that suggest that we’ve hit rock bottom. Perhaps we haven’t. The effects of CERB and mortgage deferrals haven’t been fully felt. The economy hasn’t fully re-opened to see those effects.
One thing that could be seen with such low rates is the effect that it has had on housing prices across Canada. Despite the high unemployment numbers, the mortgage deferrals and the rotating lockdowns, housing prices continue to climb as money gets cheaper and cheaper to borrow. Canadians have an insatiable taste for cheap money.
If there is anything that we know going forward, these are the things we know:
- The government and banks won’t let the real estate market fail or fall
- The Bank of Canada has committed to keeping rates low until 2023
- Mortgage rates are sitting below the inflation rate, money is essentially borrowed for free
Where can rates go? I can’t predict. It could go lower if the economy can’t pick itself up after the pandemic, but given the Bank of Canada’s mission to keep rates low for the next few years we will see cheap money for a while longer.
We Can Do With Less
This might be the single biggest thing many Canadians have realized with the pandemic. We can do with less. Once all the restaurants, malls and activities were locked down for Covid prevention, Canadians went into hyper savings mode. During the second quarter of the year Canadians were saving 28% of their disposal income.
That was astronomical. It brought back the days of our great grandmothers who socked away every penny they earned to save for another day. The increase in savings also coincided with the $80 billion in CERB payments that were handed out by the government. Furthermore, mortgage deferrals provided by the bank also increased Canadians savings. When there’s free money handed out, but nowhere to spend, it got saved for a rainy day.
Despite the lack of spending, many Canadians found out that they could still get by in life just fine. There were no date nights, but they got replaced by steak dinners and a glass of wine for a fraction of the cost. There were no movie nights, but it got replaced with a Netflix film and a beer for the price of a movie popcorn. Many people found refuge in the wonders of nature and the beautiful parks that Canada has to offer.
The shift in behaviour by many Canadians meant that people could still be happy but spend less money doing it. Will this be the norm once the shopping malls and restaurants re-open? Many feel that this is just temporary, but a drastic change in the behaviour of Canadians could have a profound effect on our economy.
Sticking To Your Investment Thesis
2020 was the perfect year to test your investment thesis. Did you pass with flying colors? Prior to this year, the markets haven’t had a spectacular crash since 9/11. Most investors think they can handle the volatility of the stock market, but 2020 showed how brutal the markets could be. A quick drop of over 30% in a matter of a few weeks was enough to spook the pants out of many amateurs. Did you sell?
The crash was a true test to every investor’s psyche. A traditional 60/40 investment portfolio wouldn’t have bore the brunt of the crash as much as a stocks only portfolio. Those that were resilient and rode out the volatility were ultimately rewarded with a record setting stock market. Those that sold at the bottom of the crash are probably licking their chops and angry that Mr. Market screwed them again. Which one are you?
If you were unfortunate to sell all your stocks at the bottom, perhaps it’s a sign that the stock market just isn’t for you. A more balanced approach or other investment assets might be more appropriate for your risk appetite.
This was also they year of the revival of Bitcoin. Yes, if you thought the stock market did really well during the pandemic, then Bitcoin really hit it out of the universe. Starting at roughly $8,000 to begin the year, Bitcoin surged to $29,000. Yes, that’s nearly three times in gains!
It’s hard to explain the benefits of Bitcoin. No one in their right minds would put their life savings into it, no one except for maybe Elon Musk. This time many institutional investors have piled on to give Bitcoin more legitimacy. Yet it’s too volatile for savings. No one in their right might would pay for anything with Bitcoin because 2 days later you would have lost out on another 5% gain. So where will Bitcoin end up? No one knows. I certainly don’t have a clue.
The Year No One Wants to Remember
To sum it up, 2020 was the year that no one wanted to remember. The Covid-19 pandemic threw off many financial plans and stalled the lives of many. It was almost like everyone’s life was suspended in time and trapped at home.
One of the many takeaways from 2020 is whether consumers will continue to put save their money rather than spend. Will the end of the pandemic revert us to our old ways? What will the world look like after the pandemic. What we do know is that humanity will get over the virus. We’ve seen many heroic efforts throughout the world by first responders and health care workers. We’ve seen crazy technological advances happen because of pandemic and it shows that even with adversity, humans will adapt. We will get better. Stay safe and let’s hope for a better year next year!