Today we return to one of my favourite subjects, and one that we periodically visit on these
pages: UK house prices measured in gold…
As regular readers and viewers will know will know, I am firmly of the mind that unaffordable
housing in the UK (and indeed across most of the developed world) is as much a consequence
of the system of money and credit as it is of dumb, prohibitive planning laws.
If interest rates reflected actual inflation, the story would be very different.
And I’m not talking about the consumer price index (CPI) measure targeted by the Bank of
England (and even that now stands at over 6%).
I’m talking about the inflation of the money supply, whether via debt expansion or quantitative
easing (QE), and the resulting costs felt.
House prices are currently rising at roughly 11% a year, and you’re telling me inflation
is only 6%?
Pull the other one.
The incremental effects of these rises – 7% one year, 12% the next – over many decades
have made house prices ludicrously unaffordable to young people.
It’s been going on since at least the early 1990s, and the days when Ken Clarke was chancellor,
and earlier.
Salaries have not kept up.
If interest rates rose to reflect our current 11% house price inflation then the ensuing
rush for the exit would pretty quickly make house prices affordable again.
The entire house-of-cards economy would come crashing down too, but that’s another matter.
For this reason, we conduct the occasional exercise of measuring house prices in sound
money.
Gold has served this role since the Stone Age, and so we bow to the wisdom of Mother
Nature, and use it here.
The average price of a house in the UK is now £280,000 according to the Office for
National Statistics and the Land Registry.
The average salary is £31,285, so house prices are at nine times earnings.
The house prices to earnings ratio in most big cities, especially in the south, is much
more distorted than that.
It was three times when I bought my first flat in London in 1993.
We’ll start with house prices in pounds.
This chart does not show the latest prices of 280 odd, just up to December’s 274, 412
This chart goes all the way back to 1953, when mortgages barely existed.
Debt is the big driver of house prices – if there is no debt in a market, prices will
reflect local cash levels and be much lower.
Introduce debt, and up go prices.
(Debt, even with all that QE, remains the biggest supply of new money).
On the other hand, debt makes it possible to do things now you would otherwise not be
able to do – like buy a house.
But keep debt costs low and more money enters the system, prices stay high and the economy
“grows”.
That’s why the authorities prefer to keep interest rates down.
“You’ve never had it so good”, was the government’s cry at the time, as the Tories
actively encouraged a “property-owning democracy”.
Stamp duty was cut and the government lent money to building societies, so they could
issue mortgages.
Home ownership rose from 29% in 1951 to 45% by 1964, and the train of higher prices was
put in motion.
They rose by over 50% during that period.
The above chart is astonishing in its relentless rise higher.
It looks like bitcoin!
The crash of the early 1990s, in which hundreds of thousands of people lost their homes amind
surging interest rates, is a mere blip.
Far fewer lost their homes in 2008, because rates were slashed.
But looked at from another perspective, you can see just how much value your money has
lost.
In 1953, the average house cost £1,891.
Today it’s 150 times that.
The pound has lost more than 99% of its purchasing power in 70 years.
Money.
Huh!
It’s a fraud.
But you can’t do without it.
… but the gold in your vault has not Next we turn our attention to UK house prices
measured in a much sounder form of money - one that central banks can’t print.
This is the same house prices measured in gold since 1953.
As you can see, it’s rather a different story.
Back in 1953 the average house cost 150 ounces of gold.
Same price as in 2020.
Wait a minute, what?
And today a house will cost you 205 ounces of gold.
Wait a minute you’re telling me house prices are only up 30% since 1953?
If you measure them in gold, yup.
In 1980 you could buy the average UK house for 50 ounces of gold.
You could have done so in the 1930s as well (not shown on the chart).
In 2004, with gold sitting at around $400 an ounce, and the average house at £150,000,
it took over 700 ounces to buy a house.
The noughties aside, the long-term “normal” price of a British house in gold terms is
a range of somewhere between 150 and 300 ounces.
So what’s next for the house price to gold ratio?
I thought the end was nigh for the housing bubble in 2007.
I was wrong.
I didn’t foresee them slashing interest rates like that.
Wow betide anyone who calls the top in housing.
The only thing that will send house prices lower is increased rates – though even at
3% or 4% there would be problems.
No policy-maker wants falling house prices on their watch, partly because they own houses,
partly because of the damage to their reputation and partly because they don’t want to see
people lose their homes (never mind those who can’t afford).
So I very much doubt that we will see rates reach the levels that real (and even CPI)
inflation suggests they should be.
Perhaps the Bank of England’s hands will be forced, maybe by problems in the gilt market,
spiralling food and energy prices, or the rising cost of deglobalisation.
But never underestimate the ability of central bankers to print and obfuscate.
On the other hand, gold looks like it wants to go higher.
It’s gold – it has a propensity to disappoint (to put it mildly), but, from war to riots
to inflation, it is not like there is currently a shortage of fundamental drivers to push
it higher.
So I would argue that that ratio will come back to 150 ounces a house before it goes
to 300.
And, who knows, a little bit of a crisis will send it back to 50 ounces.
“Yes, yes”, my father used to say.
“But you can’t live in gold.
And gold doesn't pay rent.”
He has a point.
But so do I. Central banking has left a generation homeless.
Fiat money has done terrible things to society.
And it's all so unnecessary.
Houses should get better and cheaper.
Like computers.
Thanks very much for listening.
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