The charts you love to hate: UK house prices – in gold

Rightmove declared this week that UK property asking prices have hit an all-time high, while last week gold had one if its monster days, the like of which we haven’t seen for many years – up almost $70 per ounce on the day at one stage on Wednesday.

So today we do something we haven’t done for many years. We tackle a subject that, I believe, holds the record for MoneyWeek’s most commented-on article.

You wouldn’t think it by its title, but it an issue that simultaneously fascinates and infuriates.

The ratio of house prices to gold.

The incredible, credit-fuelled rise of UK house prices

We’ll start with a chart of UK house prices since the 1950s.

UK house price chart

The key observation here is that the relentless, near-exponential rise in house prices accelerated in 1971. That was when the last restraints that gold imposed on the insidious forces of money supply growth were finally severed, with the US abandoning the Bretton Woods system.

More than anything else – be it lack of supply, lack of new-build, repressive planning regulations, mass immigration, whatever your bugbear – it is the money system that causes unaffordable house prices.

The money supply in the UK has risen 77-fold since 1971 (from £31bn then to £2.4trn). House prices, according to the Nationwide, have risen 42-fold (from £4,700 in 1971 to £197,000 today), and by a lot more in London.

House prices rose 9.7% last year, says the Halifax. It is the Bank of England’s remit to deal with inflation, usually by raising interest rates. But, of course, house prices are ignored in the Bank’s official measure, the consumer price index (CPI), which only measures the 10% of newly-created money that goes into consumer goods.

CPI does not reflect the 40% of newly-created money that goes into property (these numbers come from think tank Positive Money, by the way).

So the Bank can ignore house price rises, say there is no inflation and thus the base rate remains at 0.5%.

If rates instead reflected house price inflation of 9.7%, house prices would become affordable pretty sharply.

In London, the financial centre, and thus where most money gets created, the relationship is even more apparent. Look at what QE (quantitative easing) and Zirp (zero interest rate policy) have done to London house prices post-2009. 2008 was a major high for UK property, but in London it was a mere blip.

London house price chart



This might make you angry

Many people criticise the exercise of comparing the ratio of these two assets – gold and UK residential property.

But ratios are a quick way of detecting relative value. Particularly so in the case of gold, the function of which is to store wealth. You can’t grow the gold supply with QE or loose lending, so it is not so easy to debase.

So we look at UK house prices relative to gold over the same period. (My thanks by the way go to Nick Laird of sharelyx.com for the charts.)

Gold is currently £835 an ounce. The average UK house price is £197,000. So it takes 235 ounces to buy the average UK house.

(The price has moved quite a bit over the past week – the chart below dates to the end of 2015.)

House price/gold price ratio chart

Here’s where people get angry. In gold terms, UK house prices are the same price as they were in 1988 or in 1963, when it also took about 235 ounces of gold to buy the average UK house.

In 2004, the peak of UK house prices relative to gold, it took 720 ounces to buy the average UK house. In 1980 (on an intraday basis) and also in the 1930s, the ratio went to 50 ounces. So 50 to 720 ounces is the extreme range.

During gold’s great bull market which ended in 2011, I had 200 ounces as my first target, which (from memory) I then lowered to 150 and then to 100.

As it turned out, 150 ounces was the point at which to move out of gold and into property. 2011-12 was the time to do it. Easy to see now.

For the last three years, property has been rising against gold, and I’d suggest that the 300 ounces of gold area is a pivotal point. I’m hoping (not a good investment strategy) that 300 marks the high, and that we get another wave of gold appreciation that takes the ratio to the 100 area.

Maybe we’ve already peaked at 275 ounces. We’ll see. Maybe the coming political upheaval of the next three years will take us towards 100. (Or maybe we go back to the 2004 heights of 720 ounces. Nobody knows.)

In the short term – the next couple of months – I’m gold bearish. As 2017 gets closer, that view will change.

As for UK property, broadly speaking, I’m bullish. In many parts of the UK it is, in my view, cheap. There is a strong case for buying in the Midlands, in the North or the West – anywhere really except London, the South East and certain hotspots such as Bristol, where prices are out of all kilter.

London – as measured in gold

London is mad crazy expensive, whether relative to the rest of the UK or to earnings. Problem is though, everyone wants to live here.

The hope is that the hissing bubble in new builds (and by the way, I was the first journo onto that one) will bring down London property prices generally. We’ll see about that one.

Here’s the chart of London relative to gold since 1995.

House price/gold price ratio chart

Again 2004 was the peak, and 2011/12 the low. Currently, with gold at £835 and the average London property £514,000 (according the Land Registry), we’re talking 615 ounces – so the price has come down quite a bit just this year.

London property price inflation has slowed. So if gold can hold above $1,200 (£800) then perhaps we’ve just seen a turn.

That’s what I’m hoping. But who knows, maybe the trend resumes and we go all the way back to 2004 prices. It’s possible. We’d need a bull market in sterling, the bear market in gold to resume, and another bull market in London property.

But if that happens, London property will be so unaffordable the government will have a 1799-style revolution on its hands.

  • Van Dieu

    Great article.
    Relative ratios are just about ALL I look at these days, rather than £value. Oil is currently generationally cheap compared to other assets. Nobody knows how much further houses may go up or commodities may go down, but I know where I would rather put my money based on relative prices.

  • Ana Prada

    I think you need to measure UK house prices against consumer debt which stand at around 150% of GDP, not that GDP probably measures anything. Like the other poster states, gold has never purchased so much oil. There is also a correlation between the Dow & gold. If the Dow is 2x-3x higher than gold, gold is is historically in a bubble. But the Dow was 15x gold. Gold & silver are so manipulated, they are not exactly price sensitive markets.

    People are buying gold now because they don´t trust banks (EU Bail In Act 2013). People fear a repeat of 1929, Cyprus where they lose everything. When UK house prices fall banks/BS balance sheets will be decimated. I would think it very prudent for many people to now start to buy physical gold (I don´t know how rare silver is). When you start hearing denials, you know that things are seriously wrong. Gold should be measured in months/years not weeks/months.

  • rory

    …a logical argument with just one flaw. You can’t live in a bar of gold and, assuming a rental return of 5%pa over the last 50 years, a simple comparison between house prices and the price of gold rather than the total return against each asset class is meaningless. Do people, excepting Van Dieu obviously, actually pay money to read this rubbish?

    • LeMonsieur

      Thank for your considerate comments.

      No, people don’t pay money. The article is free to read.

      Of course, houses have a rental income. There is also the cost of depreciation, repairs and so on. Costs, yields, future potential price appreciation or otherwise are all taken considered to varying degrees when a price is agreed in the market place. We are considering that price in gold terms.

      Houses have a utility. Gold has none. Some people don’t like it for that reason. Others argue that its very lack of utility, bizarrely, is what makes it special.

      • Ana Prada

        Gold is currency (a means of exchange) nothing else. A house is only worth something if you have a store of value. Don´t forget, you have a mortgage on a house, so the first 11 years on a standard mortgage go on solely %. A house could be classed as a debt as well as an asset.

        Gold is far from “rubbish”. I think those that hold will be well rewarded in the coming years. You have to be intelligent to understand the beauties of holding physical gold..

    • CortexUK

      Missed the point of the article much?

    • Mr.Maxi.Psycho

      Gold needs no repairs, is pretty much indestructible, is not taxed just for being there, does not have bad tennants, is highly mobile (sometimes at a click of a button these days), is recognized and accepted the world over, can be hidden from thieves and governments…

      Sure I’d go for a £300,000 house over £300,000 in gold (definitely not in the north or midlands though as suggested in the article), but you can’t pretend gold doesn’t have value or utility.

    • Beautyon

      The problem with this “argument” is that it does not take into account the problem described here; the nature of the money everyone in the UK is compelled to accept for all transactions. IT is designed to increase in supply by two percent each year; that means if you have £100 in the bank, in a year it will have £98 spending power. These are indisputable facts.

      Saying, “You cant live in a bar of gold” is a pure fallacy. You cant live in a house of paper, or even more absurd, intangible fiat currency, and yet, this is what people like rory believe is real money. The fact of the matter is that anyone who stored their wealth in Gold in 1963 or 1988 can buy a house with it today despite the astronomical price increases in fiat. This is something that the Statists know is true, but cannot stand to read. This is something the Jeremy Corbynistas refuse to accept, because they are wedded to Socialism and the teat of Keynes. They know subconsciously they are being robbed, are intellectually and emotionally wedded to the fiat money system and the democracy that enforces it, and cannot bear to be corrected.

      What is coming next will chafe them so hard they are likely to spontaneously combust like a twirling twig in the hands of an Indian fire maker.

      Bitcoin.

      Bitcoin not only is non inflationary, having an immutably fixed number units, it is entirely Stateless and frictionless. There is alot of hysteria over 500 euro notes. Bitcoin has no denomination. You can send millions of pounds worth of Bitcoin to any person on Earth, without the need for a bank to facilitate the exchange, at a cost of pennies.

      This is a transaction that happened only a few hours before thiis reply:

      https://blockchain.info/tx/d153a59e3b0000b316c160a39aaa6fce985c6b875e0d731e4286891da1cc738b

      it is $8,000,000 dollars worth of Bitcoin.

      No matter what you think about the nature of money, the nature of Bitcoin, the proper role of government, there is nothing you can do to stop Bitcoin and to a lesser extent, gold, from acting as true money. No argument, mixture of fallacy or hysterical chuntering can stop these things from being true and working exactly as advertised.

      This is an existential problem for not only the money of the State, but the blinkered, Pavlovian blathering of Statists, who refuse to accept reality, even when its consequences are put right in front of their noses.

      • Doug Macleod

        Your definition of “real” is a bit weird. Gold is only valuable because we perceive it to be. Put some in the dog’s bowl, it’s still there tomorrow. Its value is a human concept, same as the value of paper money or Bitcoin. It has some value as material, but if that was all we used it for the price would be much lower. Therefore it’s price is as ephemeral as the price of anything else.

        • Beautyon

          Your opinion, that it is “weird” doesn’t mean anything. Something can be unusual but absolutely true, and of course the utility of the things people use as money is beyond dispute amongst people who are serious.

          If you want to tackle the idea that gold is money, you are going to have to try and make a real argument, and perhaps, try for an original one, rather than someone else’s you merely recite.

          This mode of thinking is rife, and the people who trot it out do so genuinely believing that they are insightful. What they fail to grasp is that they are repeating what the masses think, verbatim, without knowing they have been brainwashed so that they will accept pieces of paper as money, and be satisfied with it, and jump to defend it reflexively.

          Like many people who exist at that level, you will be dragged along for the ride no matter what happens with Bitcoin and the form of money people use. I suggest you stock up on popcorn and take a seat with everyone else.

    • Juanfranco Manganelli

      Another thing to consider is that in many places you can rent cheaper than you can buy a house that is another way to see overvaluation in houses. I think all new build Uk is now over value thanks to the healp to buy. Cheap money policy an artificial demand that only help builders. In many places is bettqer to buy old houses they have more square footage and might be up to 30 per cent cheaper

    • http://seriousgames.ning.com aac74

      You also can’t eat a house! Much easier to swap gold for food. What good is a house if you are starving and can’t buy the last rotting turnip in the field? Gold is basically portfolio insurance against currency devaluation or collapse. It is always liquid so you are always liquid.

    • Van Dieu

      Very good. I’m sure you’d still be happy to buy a house and live in it when the average price is x20 wages and yields are about 1%, while I’ll sell my house, let the landlord subsidize me and acquire other forms of wealth with the money it saves.

  • Londynczyk

    Lovely stuff…
    It perfectly shows how great investment gold really is. Around 50 years ago your gold could buy you a house, same as now. So if you didn’t sell it at that time and continue to hold it instead of buying a house, you can still buy a house now! Really, really impressing! Don’t forget to forget all money you would have made if you were to rent your house for 50 years, currently avarage around £800 a month. Money Week is always a good laugh. thanks!

  • MrPDes

    The graphs simply show that the trust people have in storing their wealth in Gold has been similar to the Trust people have in storing their wealth in Land/House. Remember that the land that a house sits on has similar wealth storing properties to Gold.

    The gold-house price graphs how this trust sways too and fro between Gold and Land/House.

    First graph indicates the trust people have in storing their wealth in fiat paper and Land/House. Notice how there is little tooing and froing. The trust is very one sided….for a good reason.