Your House in Gold Bars

19th June 09 - Your house in gold bars

Coming right back down to earth after all the mega-bucks of the macro-world, I have been studying the Nationwide’s Bullionvault.com graph. This graph shows over a 55 year period to 2008, the relationship between the average UK house price expressed as a multiple of the gold price per ounce in pounds sterling. The rationale is that gold is the safe haven of commodities and so if the house price multiple is high, consider that something rather artificial is occurring and beware of a crash.

In 1953, the index stood at 150 and after rising to about 310 in 1971, fell back to just less than 100 in 1980 before an inexorable climb to (wait for it) 700 by 2004/5. The descent was like coming off striding edge of Helvellyn, that is to say, very steep and after stopping for breath in early 2007 precipitous to stand by the first quarter of 2009 at 220. One can look at this data in at least two contrasting ways. Either we are now back to something approaching sanity with house prices or, even today’s depressed housing market post the credit crisis, is till only just lower than the long-term average relative to gold bullion and has much further to fall.

This bricks and mortar/gold price relativity is particularly interesting given that the UK’s largest building society Nationwide put May 2009’s rise in house prices at 1.2% and this at a time when GDP grew by 0.1%. It would be wise to be cautious in fishing for the bottom in the domestic housing market. The big difference between today and the housing slump of the 1980’s is that interest rates are much lower now since the Bank of England’s base rate is 0.5%. It is therefore less painful to be in debt now all ye first-time buyers but beware the trend line. Unemployment is still rising like the housing/gold graph up to 2005 and interest rates can only go up and indeed as this is written, they are doing so in relation to fix rate mortgages.

Adrian Ash of bullionvault.com claims that if you had sold the typical home five years ago and used all the cash to buy gold, you could now afford to buy 2.7 of those properties. The problem with that of course is that we all didn’t.