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We were astounded by the number of reader responses to my Money Morning piece last week on the ratio of UK house prices to gold. In terms of readers' comments, it broke the record, previously held by Merryn for her piece on the minimum wage. I even had a irate email from my father on the subject. Not all the comments were particularly polite, but they did raise a number of legitimate concerns which I want to address here.
The idea was to look at the performance of the UK housing market relative to gold since 1968, and to show that from a peak in 2005, the average house price is down some 70%, even though in nominal sterling terms it is only sitting roughly 10% off its peak.
A number of readers seemed to think that making this point means that Moneyweek has somehow turned bullish on the property market. Not so. Everyone at Moneyweek has their own opinion, of course. But our editor-in-chief Merryn Somerset Webb is still a declared bear (read her latest thoughts on the subject here) and for my part I would argue that now is perhaps the worst time in history to be buying property.
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Property prices have only held up because interest rates have been suppressed to artificially low levels by policy-makers who appear to have decided that saving the banks, credit and housing markets is more important that saving the currency. Indeed devaluing our currency seems to be one of the strategies - albeit an undeclared one - for paying off our national debt.
But even in this environment of low rates, transaction volumes are below the levels set in the 1989-94 crash. House prices bear no relation to earnings, which, largely speaking, are flat or falling. They bear little relation to rental yield. Credit is tight. Estate agents report that more and more property is coming to market - and this is particularly the case since the abolition of HIPs. The threat of rising rates is lurking around the corner like a drooling bear - the OECD thinks UK rates should hit 3.5% next year. And of course the proposed rise in CGT, if it materialises, is going to send a virtual tsunami of buy-to-lets and second homes onto the market.
I think its pretty to hard for anyone to argue that I am somehow bullish about property, given the above.
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A number of readers also questioned the legitimacy of measuring one market in terms of another. You buy and sell a house in pounds, they say, so that is all you really need think about. But comparing the ratios between markets is a widely-practised and, in my view, useful strategy that can help us to gauge what is cheap and what is expensive in relative terms. Commonly used ratios are the share price-to-earnings ratio; rental yields vs house prices; wages to house prices; the Dow-to-gold ratio; commodity prices relative to commodity-producing companies; commodities vs stocks; stocks vs bonds, and so on. All these comparisons can serve a helpful purpose. Yes, the house-price-to-gold ratio doesn't take rental income into account but it is still an interesting gauge of relative value. And, given that there are so many people, many of them regular Moneyweek readers, that have rolled their wealth out of property and into gold, it is an extremely relevant one to our readership.
Gold is in a bubble, said others, so the comparison is invalid. Gold may or may not have got a little ahead of itself, but it is not in a bubble - not yet anyway. Merryn wrote on this subject just last week as well. To put things into perspective, here we look some recent bubbles. Below is a chart which overlays the Nasdaq bubble, the US housing market bubble and gold - you can see that gold has a way to go in its cycle before it hits full-blown bubble territory.
Others argued that there is no point comparing housing to something as useless and inanimate as gold; you can't live in gold bars, after all. I'm not going to get into the what's-the-use-of-gold argument here - if you read Moneyweek, you will know how we think about it - save to say that it is in part because of gold's relative industrial uselessness that it has so served so well as money for thousands of years. Unlike modern fiat currency, it is, broadly speaking, beyond the power of governments to debase (you can chip coins, but that is a different matter) and so it preserves its value.
That's not the case with Mars bars, something several readers suggested would be as much use as gold for measuring against house prices. I do not have the actual data. But, from memory, when I was a child in the 1970s, a Mars bar cost 5p. It now costs somewhere between 50 and 60p, depending on where you shop. That's a 1000% rise. That's not because Mars bars have appreciated in value, it is because modern money has lost and keeps on losing its purchasing power. It is the great fraud of our time. I think it is that stark revelation that upset so many readers.
These are incredibly frustrating times. A whole generation has been alienated by the absurdly out-of-reach property prices in this country. Many, having rightly identified that property was in a bubble, either stayed out or got out, only for the long-overdue correction never to fully materialise. Meanwhile, they see the purchasing power of their money evaporate, and it seems they will never be able to buy anything unless they cripple themselves with debt. This is all an unfortunate consequence of the modern fiat system of money and credit. It causes malinvestment, it creates rampant asset price inflation, booms, bubbles and, eventually, busts.
In response to all this there isn't much we can do other than move our wealth into stronger foreign currencies or an asset, such as gold, that a government can't debase. And there might be another opportunity to do that coming up in the next few months. There is a lot of turbulence dead ahead in global markets. Gold may well sell off in the carnage. If it does and we get our usual summer low, take advantage.
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Dominic Frisby
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