Of all the subjects I cover in Money Morning, there are two which attract more hits and comments than any others.
The first is house prices. No surprise there. Love them or loathe them, everybody’s interested in house prices.
The second is gold. Again, no surprise there. It’s a sexy metal, it’s a political metal, it fires people up.
But – rather bizarrely – when I write about house prices measured in gold, that really brings in the hits – and with them the comments, the shares and the trolls.
And house prices measured in gold is the subject of today’s Money Morning.
Why it makes sense to measure property prices in gold terms
Until 1914, and then between 1925 and 1931, Britain was on a gold standard. You could buy a house with gold. Now, of course, you can’t. But that doesn’t invalidate the practice of comparing the ratio between the two to determine relative value.
As gold is so constant, it makes an extremely effective unit of account. And the two asset classes are not as different as you might think.
Many overseas investors buy property in London (and to a lesser extent elsewhere in the UK), as a way to store their wealth, away from the clutches of their governments. They buy it for the same reason many people buy gold.
And London property has been about the best hedge against inflation of the money supply since the 1970s that ‘normal people’ have been able to access. That’s because 40% of newly created money – through mortgages, or ‘death grips’ (which is what mortgage actually means) – has gone into property.
For all these reasons and more, it’s perfectly reasonable to compare the two markets. So let’s get started.
UK property is a rigged market
The average UK house costs £187,964, according to the Nationwide.
An ounce of gold is about £810.
So it currently takes 232 ounces of gold to buy the average UK house.
The ratio reached its most extreme in favour of property in 2004 – then, the average UK house cost 720 ounces of gold. In gold terms, in other words, property has fallen by almost 70% since 2004.
In 1980, the average UK house could be swapped for less than 70 ounces of gold. In 1932 the price was even lower.
When gold was in its bull market, I was targeting 100 ounces to buy the average UK house. We got to about 150 in September 2011, and again in late 2013. If you were out of property and in gold, 2011-2013 was the time to switch. It’s so obvious now in hindsight.
In the last three years, UK houses have risen by about 60% in value against gold.
Below, courtesy of Nick Laird of Sharelynx, we see the ratio of the two markets since 1953.
Since the turn of the year, the ratio has turned back down. The property market has stalled, and is falling in London. Meanwhile, gold has improved. The question now is whether this is just a small downward blip in a rising trend, or whether that move since 2013 is actually reversing.
I have to say I’m reluctant to make an aggressive call. UK property is such a rigged market that it’s almost foolish to bet against it.
If you ignore the decade from about 1997 to 2007, when UK property went above 300 ounces, you’d say that UK property is currently fully valued against gold – not extremely, just fully. But if you include that period, then gold is not far above the middle of the range. We’ll call 200 ounces the middle of the range.
I can find arguments that gold is on its way to $1,050 or even $850. I can just as easily make the case that in three years’ time it’ll be trading north of $2,000.
As for UK property, there are two things that push me into the bear camp. First, the train crash waiting to happen that is London new build.
Second, the demographic shift. The under 40s can no longer afford houses in areas they want to live in. They are getting older. As each year passes, more people are coming into the workplace, wanting a place and unable to afford one. The political desire for high property prices is waning.
Once the gold-to-house-price ratio turned in 2005, it was easy to declare that the market was heading lower. This time around, older, wiser, with less testosterone in the system, I can only cautiously – not confidently – argue that gold is going to outperform property. We’ll head back to 200 ounces I’m sure. But 150? Hmm, maybe.
For your fun and interest, Nick has also put together a ratio of London property prices against gold since 1995. It’s amazing to think that, in gold terms at least, London property was actually cheaper in late 2011 than it was in 1996.
The average London house now costs £458,283, according to the Land Registry. With gold at £810, that is 565oz. (Gold was higher at the end of January, hence Nick’s figure of 537 ounces).
The sheer volume of overpriced new-build property coming to market in London is bound to mess with these averages over the next 24 months. The choice between gold and a London new-build is an easy one. Between gold and a period property, it’s less clear. But at the moment I think I’d go for gold.
UK house prices versus silver
For those with an interest in silver, next we show UK property against silver over the reign of Queen Elizabeth II.
It’s amazing to think that in 1980 a house cost 1,500 ounces of silver. That’s equivalent to about £17,100 in today’s money. (Silver is now about £11.40 an ounce).
When silver went to $50 in April 2011, you could buy the average UK house for 6,000 ounces. At 17,500 ounces, UK houses have almost tripled since then in silver terms.
In London they’re up over fourfold, as we see from our next chart.
The average London house was about 12,000 silver ounces (less than £150,000) in today’s money barely three years ago.
If you roll from property into silver and back again – and (most importantly) get your timing right – you can make a lot of money!
And that’s the question I come back to. Is this a temporary pull back in a rising trend? Or has the trend reversed?
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