Gold looks a better bet than UK property – here’s why

Gold bars © Getty Images
Gold bricks: better than housebricks

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Today we return to a subject that has been a favourite of mine over the years: UK house prices – but with a twist.

We don’t consider them in the debased, devalued currency that is the pound. Rather, we measure them in the eternal currency that is gold.

What is the use of money?

Money has three functions: to be a medium of exchange, a store of value, and a unit of account.

Sterling functions well as a medium of exchange within the confines of our national borders (though it is less effective overseas).

As a store of value, it’s been awful. Every year it loses purchasing power, and the interest that is paid does not compensate the loss. Real inflation is much higher than the Bank of England’s traditional measures – RPI and latterly CPI – show.

Indeed, sterling has lost more than 95% of its value over the last 100 years, which measures sterling’s purchasing power, shows.

Value of the pound, 1750-2011

(Irony of ironies, this chart – which is based on a range of official inflation measures – comes from a Bank of England paper. The Bank of England is supposed to be sterling’s steward.)

A few years ago, Lloyds Bank showed how sterling had lost more than 90% of its purchasing power in the last 40 years alone, and no doubt over the next 40 years, it will have lost 90% of the purchasing power it has today.

When money loses its purchasing power like this it also means that its value as a unit of account is brought into doubt.

A good unit of account must maintain its value, which sterling does not. As a result, if we want to measure prices over an extended period of time, we must resort to “inflation-adjusted” prices and the like, which are extremely arbitrary.

By way of illustration, let’s start with UK house prices, in sterling, since 1953.

UK house price chart

(All of these charts, by the way, come courtesy of my main man, Nick Laird, over at goldchartsrus.com.)

You can see it’s a virtually never-ending climb higher, with two interludes – one in the 1990s, and the other following the global financial crisis of 2008.

However, this inexorable rise is as much due to sterling’s loss of purchasing power as it is to rising UK house prices. It could never have been allowed to happen if house prices had been included in the Bank of England’s measures of inflation, but they were deliberately ignored.

The easiest way for ordinary people to hedge against the debasement of their money has been housing – and that’s probably the main reason that buy-to-let grew to become so popular (although new tax laws look like they have killed that particular game).

Gold, which cannot be printed or debased, is all but useless as a medium of exchange. But it has made for a much better store of value and a much better unit of account than sterling.

Thus we consider UK house prices in gold.

Gold – a much more reliable financial measuring tape

As of now, one ounce of gold is worth around £960. The average UK house is, according to the Nationwide, worth £211,625 – or 220 ounces of gold.

(By the way, I’m fully aware these ratios don’t take into account the utility of a house; the yield if you let it out; the fact that mortgages have been so dirt cheap these last ten years; the tax costs of selling gold at a profit and so on. Comparing the ratio between two markets is nevertheless a useful exercise in determining relative value.)

Here are UK house prices measured in gold, going back to 1953.

UK house prices in ounces of gold

Comparing those two charts – house prices in sterling and house prices in gold – the story is quite different. When you look at the journey UK house prices have been on measured in gold, you also get a clearer idea of just how much sterling has been debased, particularly since 2008.

(And, by the way, the received wisdom is that currency debasement most hurts savers. Actually, the hardest hit are the asset-light, salaried classes – usually the under 35s).

Measured in gold, from 2005, house prices fell for six years, so that by 2012, at 150oz for the average UK home, they were briefly back to where they were in 1987. It’s astonishing.

Even today, at 220oz for the average UK home, we are only at mid-1990s prices.

You can see the rally that housing has enjoyed post-2012, from 150oz to around 275oz in 2016 (which now looks like it was the peak of the market, in gold terms at least), which was as much to do with gold’s decline as it was housing’s appreciation. Post-Brexit, gold had a good rally against sterling, and house prices have fallen in gold terms.

It’s also amazing to look at how low housing got in gold terms back in the 1980s – to less than 100oz. Will we ever go back to those levels? Possibly.

A crisis in the bond market; inflation; rising interest rates; a rush to gold; all coupled with the fact that, with a generation priced out, it is no longer politically desirable to prop up house prices in the way that it once was.

It looks far-fetched just now, but it really wouldn’t take that much to get us there.

What’s next for London house prices?

So to London. London and the rest of the UK are two very different beasts when it comes to house prices.

First, here’s Greater London since 1968 in sterling terms.

Greater London house prices

Up, up and away.

And now here’s Greater London in gold.

Greater London house prices in ounces of gold

Where London has differed from the rest of the UK (perhaps with the exception of the likes of Oxford, Cambridge, Bristol and Brighton) is in the breathtaking rally it has enjoyed since 2012, whether in sterling or gold. The average London house went from 150oz to almost 450oz. From low to high it nearly tripled.

The market got massively overheated by about 2015-16 and has since pulled back. We now have atrophy at the top of the market, thanks to George Osborne’s higher stamp duty, and central London, agents report, appears to have pulled back by 10% or 15%. In gold terms, we are back at 350oz.

Unlike the rest of the UK, we are nowhere near the early 1990s levels of around 200oz.

Where London goes next depends, to my mind at least, on the current chancellor. Stamp duty is punitively high: it’s 10% above £925,000 and 13% above £1.5m – even more for second homes. It’s killed the top of the market.

But despite lower transactions levels, revenue to the Treasury is also high, so that will be a deterrent to any chancellor wishing to reduce it. If stamp duty stays high, London property heads lower. If it doesn’t, then the outlook is brighter.

As for gold, meanwhile, my outlook remains as it’s been for a while: that we will range trade. Out on the horizon, the dominoes are slowly lining up for another bull market in gold – excuse the mixed metaphor – but we are just not there yet.

In all, of the two, gold – trading in a range – looks a better bet than property, which looks as though it’s heading lower.

PS Nick Laird has put together charts for each region in London. I’ll post them on on my twitter feed later today.

  • Timothy Stroud

    Very interesting article. All your calculations are done in £s sterling which makes
    sense for a Briton because calculations in US $s are irrelevant. I do not have any
    faith in the current Chancellor to understand how or why the markets move,
    and we are clearly on a roller-coaster as far as Brexit, Italy, and the EU are
    concerned. The Russian and the Chinese governments buy gold bullion on
    a regular basis, to build up reserves while they can. Very sensible in my view.
    It is not widely known that Italy has huge gold reserves, which might come in very
    useful when the new Italian government gets kicked out of the eurozone.

  • Yes, your chart shows that an a relative basis either property is overvalued or gold is undervalued but it misses two critical points. How liquid are these assets and what are the transactions costs.

    The bid/offer spread of say a 99.99% purity kilobar is about 2.25% while a property on a buy-to-let basis is north of 10%. Further, to trade out of a property can take 5 to 7 months while gold is highly liquid and cashing in would take 5 to 7 minutes. So not is physical gold undervalued, it is more liquid with low costs to boot.

  • Glass Beach

    great article!
    by side-stepping Sterling it really brings home where true value actually sits and the fantacy of FIAT currencies.

    time to dig a hole under the floor boards and burry some bullion

  • michael flynn

    Another London centric article!!! There is life North of the Watford gap you know. There is absolutely no doubt in my mind that property in the North of England will prove a far superior investment to gold. Prices are around 25% lower in real terms than they were 10 years ago. A boom will occur during the next few years. You only need to have a basic grasp of economic cycles to know this.

    House prices will more than double in the North during the next 5 to 7 years. If that doesn’t beat gold hands down I don’t know what does.

    Moneyweek is always pro gold and anti housing. This is completely the wrong way around. I would advise readers not to fall for the undoubted bias and invest as much as you can in Northern property before the boom. You’ll be very glad you did.

    I’ve bought 11 in the last 18 months and plan to buy another 10 in the next 12 months. You won’t catch me wasting money investing in gold. Give this a try. Go to a bank and tell them you’ve got £25,000 to invest in gold and would like to borrow £75,000 off them to top up your investment. They’ll laugh you out of court. Now ask the same question but tell them you want to invest in housing and they’ll be falling over themselves to give you the money. Ask yourselves why?

    Don’t say I didn’t tell you.

    • richard aary

      HA ha …your having a laugh ain’t ya?

      YOU michael flynn are going to see within the next 2 years the BIGGEST CRASH of our lives…

      ZERO IR since 2008 …massive amounts of debt, this has all got to UNWIND and when it does people are going to get CREAMED!

      Especially the leveraged BLT idiots!

      CRASH oh Lovely…BRING IT ON!

      • michael flynn

        I am laughing now but I will have the best laugh when property booms and you have missed the boat. You need to brush up on the economic and property cycle. You obviously don’t have a clue about how the economy works..

        • richard aary

          ha ha yeah right on…i expect YOU were in ya nappies in 1990?

          we’ll see what my £18K 50/50 share of gold & silver does over the next 7 years …lets see who has egg on their face:)

          • michael flynn

            It will definitely be you with egg all over your face. Not only don’t you know about economic cycles, you know nothing about leverage! I could use £18k to borrow £54k to buy a house. Let’s be very generous and assume your investment doubles (it won’t) and mine does. You make £18k profit but I make £72k! I also get a lot more rent in than the mortgage costs me. I win hands down. Hahahahaha!!!

            Sorted.

    • AAJ

      “Don’t say I didn’t tell you.”

      Really, you should have said 12 months ago. North and Wales are already have climbing property prices.

      The crash-ists will have their day in the sun at some point of course, but it’ll be London/Se that get brunt the most. I wonder if buying gold is an alternative for people, like me, who don’t want to invest in the north?

      I don’t have any gold. But I have been thinking that it’s about time to start building some reserves, now that most of the easy money has been made in other areas.

      • michael flynn

        Do not buy gold. It is far too volatile an investment. I’ve put my money where my mouth is. I’ve bought 11 properties in the last 18 months. I will continue to buy dozens more over the next few years. I will sell quite a few at the top of the boom. I will then buy dozens more during the crash when everyone else is panicking.

        You do realise that you can’t use leverage with gold? Get leveraged up to the eyeballs with property and you will become a very wealthy man. (just like me).

  • michael flynn

    Another thing. Using average UK house prices is pointless because London and the South East distorts the picture so much. Averages in this instance are a complete and utter waste of time.

  • Simon

    Oh oh…
    Er liebt mich, er liebt mich nicht.
    Er liebt mich, er liebt mich nicht.
    Hmm.