In 2007 I was still writing the “Precious Metals Advisor” for another firm and building my book of clients and relationships with Canadians. Harper was the PM, five-year mortgages in Canada averaged around 7-7.2%, the Bank of Canada central bank (CB) rate was 4.5%, and the prime rate at the banks was just under 6%. Gold averaged $696, and Silver was a paltry $13.38.
Here we are again. The prime is 5.95%, the CB rate will soon be over 4%, and mortgages are 6%, likely on the way higher. Déjà vu.
Of course, in 2007, the average Toronto detached single-family home was selling for $377,000, up 7%+ from the year before. Today that house is $1,100,000 – or about $723,000 more. The math is daunting. Back then, with 20% down, a mortgage carried for approximately $1950 (at 6%). Today that same house requires a monthly mortgage of $5,295 (at 5.35%). Moreover, in 2007 that down payment amounted to $75,400. To avoid mortgage insurance today, a buyer must cough up $220,000 (MINIMUM).
So, when does this agony come to an end? It comes to an end when the realization of recession has set itself into stone and begun to be accepted by most of the G20 nations worldwide. It comes to an end now.
Many of you might be reading this and thinking, “but how is that possible?” “We can’t fill the jobs being posted. Wages are rising slightly due to the high demand in the workforce. I have been able to pick better jobs, and the headlines tell us this is not as bad as it seems.”
Well, you are about to see an end to the hiring. Wrote Wolf Richter in his weekly report on November 15th, “Five-Digit Layoffs Are Here, the Big Ones We’ve Been Waiting for. But the Laid-Off People Are Scattered around the Globe.” This headline really says it all. When is the last time we came into a holiday season and witnessed layoffs? I will tell you when 2008. It is eerily reminiscent of that time, but as of this past week, Amazon, Fed-Ex, Meta (Facebook), Twitter, Asana, Disney, Marvel Studios, Citigroup, Morgan Stanley, Goldman Sachs, and many medium and smaller firms are now taking the proactive approach to cost-cutting by decreasing their workforce in preparation for recession.
But still, there are those who insist this is premature and that the job market remains robust. Here at home in Canada, we are witnessing a burgeoning number of employee shortages in several industries in what has commonly been referred to as a new “inflationary period” in our global economy. This might be true, and everyone can draw their own conclusions. Still, the signs and writing are on the wall already leading us into 2023, with most central banks, including ours, at home here in Canada, acknowledging that we are likely to have a recession. The question now is how deep?
The US Fed upped its benchmark rate by a robust .75 bps late last month. It was forceful, and the odds of a further .50-.75 bps this month remain high. Expect a bit more in early 2023. Then a pause. Hopefully. And the same for our Bank of Canada, where they have followed the US Fed historically 90%+ of the time. Although it was expected to edge higher, this week's announcement left the inflation rate historically high at 6.9%, and we all know we are experiencing far more than that at the street level.
The Canadian economists tell us the CB rate in our nation should top out at approximately 4.5%, which would mean a chartered bank prime of 6.7% and mortgages about exactly where they were when we had the last Conservative government, back in the latter stages of the first decade. Of course, houses have become infinitely more unaffordable over the past 15 years. In 2007 nobody talked about a housing crisis in Canada, and we were all watching the real estate collapse in the US with the subprime debacle. Average prices there tumbled just over 38% between 2006 and 2008, leading to the credit crisis and crashing Wall Street banks.
So, the real estate crisis will persist. Next year it will intensify. In 2023 we could see the mother of all price reductions as both mortgage rates continue to creep higher and higher, and a wave of new listings hits the market in spring after sellers realize the sooner they sell, the more they keep. The latter of these two predictions is currently occurring late in the year here in Ontario, especially as house listings last minute are still very active coming into the cold winter months.
The prediction does not change anything. Real estate equity will fall until some measure of affordability is re-established. With that falling equity, the collapse will be a tightening of credit (fewer borrowing means banks do less business, so they get less credit) and ultimately, with high inflation and high interest rates remaining a recessionary fallout. But guess what? Look at our favourite two metals and how they performed from the 2008 financial crisis through the recession and up to the rebuilding point of 2011 and cheap money forever.
Take all of the above and mix in an enormous cryptocurrency breakdown and a global cryptocurrency crisis in which people realize there is no alternative to protecting your wealth with physical gold and silver. You have the makings of a global financial tsunami waiting in the wings.
Hopefully, investors will realize there are other ways to use assets far less cumbersome and with no red tape, such as physical Gold and Silver, to diversify and grow their wealth. Real estate in Canada could drop a long way down. It will do so as recession sets in and burns up all our profits.
As always, there is no excuse for not being diversified.
Yours to the penny,
Darren V. Long