Britain’s Secret House Price Crash
If you want to measure a market (or anything else for that matter), you need a reliable, consistent unit of measurement.
Sounds obvious. Why then do we rely on the pound, the dollar, or any government currency, when they are not constant measures? Their value is too often interfered with by governments and central bankers and their agenda.
Even that bastion of fiscal constancy, the Swiss franc, is vulnerable, as we saw with yesterday’s announcement from the Swiss National Bank that it intends to cap the value of the franc against the euro.
Gold cannot be issued, printed, inflated or debased in any of the ways that dubious policy-makers find to suit the political whims of the times. So it makes for a far more honest and accurate unit of account than any government currency.
That’s why I like to look at markets priced in gold. I get a truer idea of value, and of where we are in the business cycle.
Today we take our biennial look at everybody’s favourite subject: the UK housing market - but priced in honest money.
House Prices have Fallen by 80%, Measured in Gold
According to the August data from Nationwide, the average UK house now costs £165,914. (That is considerably more – over six times more, in fact - than the average UK salary, which according to the Office for National Statistics, is £25,900 before tax).
Yesterday’s London AM gold fix was £1,182 an ounce. So the average UK house now costs 140.4 ounces of gold. (And the average UK wage earner takes home the equivalent of 22 ounces of gold per year).
Here we see the latest charts from Tom Fischer, professor of mathematics at Wuerzberg University, which show UK house prices measured in gold since 1930. In the six weeks since July 19 when he completed this chart, UK house prices have actually fallen by about 6% (!), or 9 gold ounces.
Regular readers will know that one of my long-term targets is 100 ounces for the average UK house. I actually think it’ll probably go to 55, as it did in the 1930s and in 1980. But I’m saying 100 as I’m utterly confident that target will be hit and I want to bask in the glory of an inbox of congratulatory emails when it does so.
What a bubble our housing market was. In 2005 the average house cost 720 ounces. So that’s a drop of 80% already. But from today’s prices, measured in constant money, I would say we have at least another 30% to fall, (that takes us to 100 ounces) or possibly 60% (which gives us 55).
But London Prices are Being Propped Up by Foreign Buyers
To my considerable annoyance – as I live here – London prices haven’t fallen by anything like as much. This is largely because of foreign buyers. For my podcast I recently interviewed Jeremy McGivern of Mercury Homesearch, an agency which sources prime London property.
He observes that over 70% of London buyers spending £5 million or more on a property come from overseas. Whether it’s from the Middle East, Russia, Europe, India or China, they’re all looking for safe places to park cash outside of their own countries.
In relative terms, London property is cheap because our currency has been such a dog. To a euro holder, even if London prices are flat, they’re down 20% by the time you adjust the currency. Very few of these buyers, adds McGivern, spend much more than a few days here per month. (And you wonder why Mayfair, Knightsbridge, Kensington and Chelsea are such ghost towns at night).
Here we add to the mix London and Scottish house prices since 1973. Thanks once again to Professor Tom Fischer for the chart.
It’s worth noting that while both Scottish and UK house prices are trading well beneath the 1991-94 crash lows – London house prices are still trading above them.
Much as I’d love to be, I’m not in the bracket that is looking to buy in Knightsbridge any time soon. That doesn’t mean I can’t enjoy the graphs, however, and Professor Tom, has put together this next chart showing Knightsbridge houses measured in gold.
This is a much smaller sample size compared to say, the Nationwide index, so the picture is less reliable. Also, the latest figures (for 2011) are not complete, so the apparent drop in the price of Knightsbridge houses with five or more bedrooms may not mean that much. In sterling terms, as McGivern observes, they are probably trading for more than ever, but a lot of these do not show up in the stats. “‘Also,” he notes, “because there are far fewer transactions at that level and some five-bedroom houses are much smaller than others it doesn’t really give a full picture, one of the many issues with generalised property information’.
But the overall picture for Knightsbridge is much the same as that of London. The trend since 2005-6 is down, but we are still above the lows of the early 1990s. Over 5,000 ounces – £6m – for the average Knightsbridge four-bedder. I must be in the wrong business.
However, one thing that could hurt prime London prices is a strong pound, as this would drive away many of the overseas buyers. I’m not as bearish as I once was on sterling – more on that another time. So I’m looking for falls, certainly versus gold. Who knows? One day you may even get on the Knightsbridge property ladder for a mere 1,000 ounces.
Why Thinking in Terms of Gold Matters
This subject of house prices and gold seems to attract more ire than any other, so, before you start venting spleens in the comments section, let me say two things. One, yes, I know the above charts do not take rental yield into account. But nor does the Nationwide, the Halifax, Land Registry, Rightmove or any of the other widely-used measures of house prices. I’m just measuring house prices in constant money, that’s all.
Two, yes, I know that because you buy and sell houses in pounds, it is the pound price that is important. But it is vital for people to see the fraud that is ‘pound price’. The pound, our national system of money, is flawed. No, worse than that, it is corrupt, dishonest and unjust. It is being systematically debased. It benefits the issuers at the expense of the holders.
You need to stop measuring markets in terms of flawed currency, and start thinking in sound currency. Otherwise you’re falling for the con. The sooner large swathes of the population start seeing this, the sooner money gets reformed and the better off we’ll all be – not only financially, but socially and morally. So spread the word, rise up, revolt, if necessary. Or if not that, at least measure markets in gold.
My latest gold report is now available – as well as looking at ways to buy gold itself, I’ve also tipped some speculative mining stocks that I think are poised to do very well in the coming years, and provided some updates on my previous tips. Get your copy of my gold report here.
This article first appeared in Money Morning, the free daily investment email from UK investment magazine, Moneyweek. Sign up here - it's free.
