How much Gold does it take to buy a house in Britain?

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 and 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-subsidised 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 areas 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.

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.

But the flood of foreign money has meant that in London the falls have been less pronounced – in fact, measured in sterling there have been rises. Get out of London if you want to find value, is the simple answer. 

If London property was purely a reflection of what Londoners could pay, then prices would be lower. But it isn’t. What’s going to stop the flood of foreign buyers for London property? A dramatic rise in the pound is one possibility. But a quick £50bn in quantitative easing has just killed that possibility, although the pound does look strong against the euro. 

Another 2008-style collapse? Possible, but don’t bank on it.

More likely is some change of legislation, a new tax maybe – a mansion tax, or a change in non-dom status, for example. I don’t know. But, to my knowledge, there is nothing in the pipeline. 

Dominic Frisby