Franc Falls and Bullion Bears Up: How To Measure Property in Gold

I was talking to a trader friend last night and he told me many of his peers have “no risk appetite” at the moment. Why? Mainly, he said, due to the capping of the Swiss franc (once a safe haven!) against the euro. Gold, he explained, is once again the “safest bet”, selling on the market at $2,000 an ounce (close of FTSE on 6^th September 2011 at $1,875.40).

Why am I writing about gold in a property blog? Well, if you want to measure a market you need a consistent and reliable unit of measurement. In this article I am going to share with you the findings of Dominic Frisby (MoneyWeek and Frisby’s Bulls and Bears) as he measures UK house prices in gold.

Far more honest and accurate than currency

Frisby’s reaction to the capping of the Swiss franc is to ask why we rely on the pound, the dollar, or any government currency, when they are not constant measures.

He explains: “Their value is too often interfered with by governments and central bankers and their agenda. Gold cannot be issued, printed, inflated or debased in any of the ways that dubious policy-makers find to suit the political whims of the times. So it makes a far more honest and accurate unit of account than any government currency. That’s why I like to look at markets priced in gold.”

140.4 ounces a house

According to August 2011 data from nationwide, the average UK house now costs £165,914. This is considerably more than the average UK salary which, according to the Office for National Statistics, is £25,900 before tax.

For this study, Frisby uses £1,182 per ounce (as per the rate/exchange at the time of writing). So, the average UK house now costs 140.4 ounces of gold, against the take home pay of 22 ounces of gold per year.

The latest charts from Tom Fischer, professor of mathematics at Wuerzberg University, shows UK house prices measured in gold since 1930. In the time since he completed the chart (July 2011), UK house prices have actually fallen by around 6% - or nine gold ounces. Indeed, the chart clearly shows what a bubble the UK housing market was!

Bullion bears

In 2005 the average house cost 720 ounces of gold, so that’s an 80% drop already. From today’s prices, measured in constant money, Frisby predicts “at least another 30% fall, taking us to 100 ounces of gold, or possibly 60%, which gives is 55 ounces.”

Frisby elaborates: “One of my long-term targets is 100 ounces for the average UK house. I actually think it’ll probably go to 55 as it did in the 1930s and in 1980. But I’m saying 100 as I’m utterly confident that target will be hit and I want to bask in the glory of congratulatory emails when it does so.”

Investor note: House prices don’t have to fall for the value in terms of gold to fall! A doubling of gold price will mean a 50% fall in house prices measured in terms of gold, even if house prices stay the same!

London prices propped up by overseas investors

London house prices are being “propped up” by overseas buyers and international investors. Jeremy McGivern of prime London property sourcing agency, Mercury Homesearch, tells us: “Over 70% of London buyers spending £5 million or more on property comes from overseas. Whether it’s from the Middle East, Russia, Europe, India or China, they’re all looking for safe places to park cash outside of their own countries.”

McGivern adds: “In relative terms, London property is cheap because our currency has been such a dog. To a euro holder, even if London prices are flat, they’re down 20% by the time you adjust the currency.”

One thing which could hurt London prices, believes Frisby, is a strong pound, as this could drive away many of the overseas buyers. He writes: “I’m not as bearish as I once was on sterling. So I’m looking for falls, certainly versus gold. Who knows? One day you may even get on the Knightsbridge property ladder for a mere 1,000 ounces.”

How to get more house for your ounce

We all want to make our assets go further. Whether that’s sterling, US dollars, or gold bullion! To get more for your money, call us on +44(0)1273 447 300 today to access our latest below market value (BMV) deals and boost your profits through our bespoke investment strategies.

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