As I mentioned last week, I may be buying a new house and I may have to sell some of my gold to do so.
I don't particularly want to, but needs must.
So today I am going to take a look at one of my favourite subjects - house prices, as measured in gold.
Why Measure House Prices In Gold?
Every time I return to this topic, comments pop up questioning the validity of the exercise. You can't buy houses with gold, runs the argument, so what's the point of looking at the ratio of the two?
First, there are many who have wisely moved their wealth into gold to see out the current financial storm. They will move out of gold when they see relative value elsewhere. Hence the need to compare the price of gold to other markets.
Second, we are living in an age where money is being systematically, deliberately debased. This is not a conspiracy theory. The Bank of England is ignoring its stated duty, which is to keep inflation at 2%. Instead, it is issuing money out of nowhere with using it to buy bonds, in order to suppress long-term interest rates and 'kick-start' the economy. In other words, it is actually trying to create inflation.
In the case of the housing market, it hasn't kick-started anything. In fact, it's brought the market to a standstill. Savers and first-time buyers are left waiting on the sidelines for lower prices, watching their savings get eroded by inflation and in some cases, simply unable to secure a mortgage. Meanwhile debtors bask in the saver-subsidized cheap living provided by the Bank and its artificially low interest rates. Yet the Bank goes on printing.
If you look at the price of anything over the last 50 years - houses, food, energy, Western wages (not in real terms, but nominal) - you will see that it has gone up. This is down to our system of money - the supply of which is potentially limitless.
The only items where these endlessly rising prices are less evident are in items such as computers and clothing that have benefitted from mass production, improved technology, and cheap labour in emerging markets.
I prefer not to use something that is being debased as my unit of account. I prefer something finite, which is why I like gold. New gold supply roughly matches world population growth - that makes it a much more natural form of money, or more natural unit of account at least.
Yes, you could use Mars Bars, as one poster suggested in the past. But they do not have the weight of several thousand years of monetary history; they are less finite; and the data is harder to come by. So let’s stick with gold.
The Massive Divide Between London and the Rest of the U.K.
First we look at UK house prices measured in gold. (My thanks to Professor Tom Fischer, of the University of Wuerzburg, for the chart).
In gold terms, UK housing has fallen by just over 78% from its high of 725 ounces in 2005 to 156 ounces in January. It is below its lows of the early 1990s, but has not yet reached its lows of the early 1980s or 1930s (50-100 ounces for the average UK house) - where, by the way, I am convinced it will be in a few years’ time.
We all know however, that the housing markets of London and the rest of the UK are very different beasts.
Using land registry data (which we only have going back to 1995), Nick Laird of Sharelynx (www.sharelynx.com) has kindly put together a host of charts, showing the average price of houses in various UK regions and London boroughs measured in gold - and also silver. There isn't room for all of them here, unfortunately (subscribe to his site if you want to see them all), so I will just post a sample.
Picking a region at random, here is the north-east of England. The market is depressed here and it takes less than 100 ounces of gold to buy the average house. Gold is well below its lows of the early ‘90s.