What does redenominating residential property prices in real money tell us about their valuation?
Adrian Ash, head of research at BullionVault, sent a fascinating note yesterday about the price relationship between U.S. home prices and gold.
When you divide the average U.S. home price by the bullion price you get the chart below.
So when you combine the recent slump in U.S. real estate prices with the jump in gold’s dollar value, we’re approaching the levels at which the relationship bottomed out in the late 1930s and 1980/81.
Adrian points out that John Paulson, whose conference calls with his hedge fund investors earlier this week have been in the press for other reasons, says he’s bullish on the outlook for residential real estate. Paulson of course shorted the property market all the way down and has so far made another billion or two on the way up.
BullionVault strikes a note of caution to temper Paulson’s bullishness, pointing out that if the house price/gold price ratio were to bottom out where it has done in the past you may still do better for a while by preferring bullion. Still, from the chart above, it seems like it might make sense to consider shifting in Paulson’s direction over the next few years.
How do things look in the UK? I’ve deflated the Nationwide house price series (which starts in 1952) by the sterling gold price in the following chart.
Although in nominal terms U.K. house prices are still not that far short of their peak, the big jump in the sterling gold price from 2004 to now (from £223 an ounce at the end of 2004 to £622 an ounce at the end of last year) means that the residential property/gold price ratio has fallen by over 60% since its top in 2004. Gold buys you nearly two-thirds more UK housing than it did six years ago, in other words. This is not the case if you use London’s property prices as a measure, but these figures are for the country as a whole.
However, if we are heading for the bottom of this relationship’s historical ratio for the last 58 years, reached in the early 1980s, then there appears no reason yet to cash in your gold ETCs and buy a house in Britain. Property prices could still fall by another two thirds in bullion terms.
Jeremy Grantham, founder and chief strategist at fund manager GMO, made the point in an interview earlier this week with FTFM that U.K. house prices have been one of the classic bubbles and still haven’t really deflated, something he expects to happen in due course.
So while houses in the U.S. are getting cheap, in the U.K. they are hardly a bargain.