By Domninic Frisby
26 May 2010
As far as advocates of sound money are concerned, the UK housing market peaked in 2005. Since then it has fallen by more than 70%.
Yes, 70%. House prices are now at levels last seen in the early 1990s, at the bottom of the last bear market. The average house price is currently 25% below its average of the last 40 years.
"But, but, but," I hear you say. "The housing market has barely fallen. The latest Nationwide and Halifax data has been showing year-on-year price rises. The crash never really came. This is insane. You're talking rubbish."
Am I?
House prices haven't risen – sterling has fallen
Certainly, data from Nationwide, Halifax, Rightmove, the Land Registry and any other reputable source you care to mention, shows that house prices rose dramatically between 2005 and 2007. There was a sharp correction of perhaps as much as 20% in 2008-9. But since then the market has rallied. There are even reports that prime London property is now changing hands at record prices.
For example, Nationwide reported an average UK house price of around £151,757 in early 2005, rising to £186,044 by October 2007. That then fell to £147,746 by February 2009. But it was back at £167,802 by last month.
However, all this data measures our housing market in our own national currency. And we all know what has happened to that.
As I said in my opening sentence, for sound money advocates, it's a very different story. The supply of gold cannot be increased by quantitative easing. Nor is deficit spending on the current scale possible under the discipline imposed by a gold standard.
Long-time readers know I like to post the charts of mathematician Tom Fischer, now Professor of Stochastic Financial Mathematics at the University of Wuerzburg, Germany. These charts show how many ounces of gold it takes to buy the average UK house. He has recently updated them.
Here is the chart since 1968:
The average house price is now around £168,000. Gold is around £825 an ounce. So it would cost you just over 200 ounces of gold to buy the average house. That's the same as in 1994, at the bottom of the last housing bear market.
The average house price back then however, was between £60,000 and £65,000 – one third of where it is now. That gives you an idea how much sterling has depreciated since then, and thus how savers have been robbed. You have your modern, government-sponsored system of money, credit, boom and bust to thank for that.
Interestingly, just as it does now, the average UK house cost just above 200 ounces of gold in 1970. Back then, a sterling buyer would pay £4,874 for the average house. If ever you needed an example of how gold maintains its purchasing power over extended periods, while that of fiat currencies evaporates, there you have it.
How low will the house price / gold ratio go?
The cost in gold of the average house over the past 40 years is 275 ounces. We're already below that. But that doesn't mean we can't go any lower. At the peak of the market in 2005, the average UK house cost an unprecedented 700 ounces. In London it was almost 1,100 ounces. At the bottom of the market in 1980, when gold spiked to $850 an ounce, the average UK home cost just 50 ounces. It also spent several years around the 50 ounce mark during the 1930s.
Fischer is convinced we're going back to 50 ounces for the average UK home. I have a slightly more sober, long-term target of 100 ounces, although I wouldn't rule out 50. Once the ratio hits 100, I'll look at rolling my portfolio out of gold and back into housing.
I'm confident we'll get there within the next three years. Gold need only rise by a third from here (from £825 to £1,100 an ounce), and house prices fall by a third (£168,000 to £110,000), to give you a 100:1 ratio. Both look very possible given the underlying fundamentals.
Or, as is more likely in my view, gold could double from here to £1,650 per ounce, while nominal house prices stay the same. I'm sure those up top would rather see this latter scenario, with nominal house prices remaining unchanged. People will believe that the so-called value of their houses is unaffected, so they won't be too upset. All the while the value of their money is destroyed. But we have so few savers, who cares about that? As one of my correspondents puts it, "nominal house prices remain unchanged, so the muppets are happy".
It's all an example of confiscation or appropriation through the stealthiest tax of all – the inflation tax. And right now, it's a policy that's being pursued worldwide more vigorously than ever before. As governments try to inflate away their own and everybody else's debts, we've already seen artificially low interest rates, quantitative easing, and multiple bail-outs. All we need now is another deflationary bust – that would get them really printing.
