The gold to real-estate ratio provides a unique perspective on the relative values of gold and property, helping investors visualize which of the two assets might be under or overpriced. This ratio essentially measures the number of ounces of gold required to purchase the average house in the UK. Understanding this metric can offer valuable insights into the current state of the housing market and its historical trends.
The Concept Behind the Ratio
Gold and real estate are both tangible assets that investors often turn to as alternatives to stocks. Gold is renowned for its stability during economic downturns, while real estate offers the potential for both capital appreciation and rental income. By comparing the value of these assets over time, the gold to real-estate ratio can highlight significant economic shifts and investment opportunities.
Historical Context and Analysis
In January 1970, the average property price in the UK was £4,396.20, and the average annual salary was £1,344.00, making the house price to earnings ratio approximately 3.27. At that time, the average inflation rate was 6.40%, and gold was priced at around £14.54 per troy ounce. This meant it took approximately 302.35 ounces of gold to buy an average property.
Fast forward to 2020, the average house price had risen to £216,092, and the price of gold was £1,185.88 per ounce, resulting in a gold to real-estate ratio of 182.22. By February 2024, the average property price reached £280,660.00, while gold's value had soared. Over this period, the gold to real-estate ratio had shifted dramatically, reflecting broader economic changes.
The Comparative Performance of Gold and Property
From January 1970 to February 2024, property values increased by 6284.15%, with the average property price rising from £4,396.20 to £280,660.00. This represents a significant gain of £276,263.80. During the same period, gold's value surged by 11001.38%, with an initial investment of £4,396.20 in gold growing to £488,038.98, a gain of £483,642.78. Consequently, gold outperformed property by £207,378.98 or 73.89%.
The Impact of Economic Policies on the Ratio
The gold to real-estate ratio is influenced by various economic factors, including inflation, interest rates, and monetary policies. For instance, if interest rates reflected actual inflation, the housing market dynamics would be significantly different. The current discrepancy between house price inflation and reported inflation rates highlights the distortions caused by monetary policies such as quantitative easing (QE) and low interest rates.
As house prices rise at roughly 11% per year, yet inflation is reported at around 6%, there is a clear mismatch. The expansion of the money supply through debt and QE has contributed to this phenomenon, making housing increasingly unaffordable for many, especially younger generations. If interest rates were to rise to reflect true inflation, housing prices might become more affordable, but such a move could also destabilize the broader economy.
Wages and Their Slow Growth
A critical factor contributing to the perception of an expensive housing market is the disparity between wage growth and property prices. While house prices have surged significantly, wages have increased at a much slower rate. In 1970, the average annual salary was £1,344.00, and today it is approximately £31,285.00. This represents a wage growth of about 2230%, which pales in comparison to the 6284.15% increase in property values during the same period.
The stagnation of wages relative to the rapid rise in property prices means that the average worker finds it increasingly difficult to afford a home. The house price to earnings ratio, which was around 3.27 in 1970, has ballooned to nine times the average salary today. This disparity underscores the impact of inflation and economic policies on housing affordability. While property values have soared, wages have not kept pace, exacerbating the housing affordability crisis.
The Long-Term Perspective
Looking at historical data, in 1953, the average house cost 150 ounces of gold. By 2020, it was still around 150 ounces, despite the massive nominal increase in property prices. This long-term stability in gold terms underscores gold's role as a reliable store of value. Even during the peaks and troughs of the housing market, gold has maintained its purchasing power.
In the early 1980s, for example, an average UK house could be bought for just 50 ounces of gold. By 2004, during a housing boom and relatively low gold prices, it took over 700 ounces to purchase an average house. These fluctuations reflect broader economic conditions, such as interest rates, inflation, and market confidence.
Future Outlook for the Ratio
Predicting future movements in the gold to real-estate ratio involves considering various economic scenarios. Increased interest rates could potentially lower house prices, making them more affordable. However, policy-makers are often reluctant to allow significant declines in property values due to the potential economic fallout.
Conversely, gold prices may continue to rise due to global uncertainties, including geopolitical tensions, inflationary pressures, and economic instability. If gold's value increases faster than property prices, the ratio could shift back towards its historical norm of 150 to 300 ounces per house.
Conclusion: Is UK Housing Expensive?
The gold to real-estate ratio offers valuable insights but should be interpreted with caution. While the current ratio suggests that gold is relatively expensive, this does not necessarily mean that UK housing is cheap. Various factors, including economic policies, inflation, and market demand, play crucial roles in determining the true value of these assets.
Investors should consider both the unique characteristics of gold and real estate and the broader economic context when making investment decisions. By understanding the historical trends and future possibilities of the gold to real-estate ratio, one can make more informed choices in the ever-evolving market landscape.
