We recently had a question along these lines posed to us. I have a home with 20% equity and 80% mortgage. I use a significant portion of my weekly income to service the mortgage and don’t seem to have any savings left over due to stagnant wages and increasing living costs. What would be the pros and cons to consider in deciding whether to sell the house and rent and then possibly use some of the proceeds to buy precious metals?
Housing vs Precious Metals? First a Proviso
Now before we begin to contemplate this and you begin to read we should state a couple of things.
- We are not financial advisors and this shouldn’t be construed as financial or investment advice merely us voicing our thoughts. Of course everyone’s position will be different.
- We could easily be accused of “talking our book”. That is to say we make money from selling precious metals so you should not forget that when reading anything we have to say. (Just as you should consider critically any opinion you hear or read and consider what the “opinion giver” may have to gain).
A Tough Question to Answer
Anyway as we said to the person this is a tough one indeed to even give general thoughts on.
1. Because everyone’s circumstances are different and the best course of action will vary from person to person, and
2. Because there are also a number of non-financial and therefore hard to quantify factors to consider.
Actually first up I should say that currently we choose to rent. This is chiefly down to the housing to gold ratio that you may or may not be aware of. Currently it stands at around 200oz. We’re looking for it to get down to around 100oz to buy the median house or thereabouts – quite likely lower even. Here’s all the articles we’ve written on this topic plus one on the NZ housing to silver ratio in case you need some background first…
Could NZ house values drop by 80%?
NZ Housing to gold ratio update
But basically if things go the way we envisage, we see the potential to trade a small stack of precious metals for a freehold house at some point or maybe for a small property portfolio even.
Non-Financial Considerations
However renting while waiting for this ratio to drop, has to balanced by non-financial lifestyle factors. As obviously there are many lifestyle downsides to renting also – (which my wife constantly reminds me!).
If you own the house you reside in then some of the hard to quantify non-monetary or non-financial factors to consider include:
- You are not at risk of being kicked out because the landlord decides to sell (have been there before!).
- You are free (to a certain degree within the confines of the law anyway) to make whatever alterations to the home and grounds you choose
- You have the security of knowing that the house is yours (although then again if you have a mortgage then really it’s the banks).
- You have the emotional benefit of having somewhere as your “home base” potentially for many years.
Obviously to the individual some of these will matter more than others.
Volatility is the Only Guarantee
Perhaps in the current environment the most difficult thing about making any financial decisions is the shear volatility at present.
Unfortunately the world we live in and the monetary system we live under make financial decision making very difficult. As the powers that be are constantly interfering, trying to prop everything up. It makes planning for the future very difficult – I’m glad I’m not at retirement age currently and trying to get an income from investments. The money masters are unfortunately doing their best to force people to take ever-greater risk to get a decent return. Under a true gold standard saving is encouraged and rewarded and planning for the future is much easier and less speculative for the average guy. But that is a whole other topic – and we will take our foot off the soapbox we were about to climb up on!
The Unknowns to Consider when Choosing Real Estate or Precious Metals
Anyway, there are many unknowns to consider in evaluating property versus precious metals.
Where Will House Prices Go?
If things get worse for the global economy and this flows on to affecting New Zealand, we don’t know if this will necessarily affect the nominal NZD value of housing. If money printing continues worldwide it could be that house values remain high in dollar terms while being devalued in gold terms. So it could be you pay your same size mortgage off in devalued dollars. So savers (other than those in gold) are losers and those with debt win. This seems to be the aim of the powers that be on recent history anyway. Hyper- inflation changes this a bit though. Here’s an article on…Inflation, Hyperinflation and Real Estate. Obviously though your costs of living are likely to rise at the same time and who knows whether wages will keep up – but it’s fair to say that of late they have been a long way from it.
How About Interest Rates?
The other main unknown is obviously interest rates. We could make good arguments for rises and just as good an argument for them staying low for an extended period. Logically it seems like they will have to rise considerably at some point when inflation likely creeps up as we are at record lows currently. But it seems to me like that may now be some time off in the future with the Fed saying they will keep them low until 2013. Here in New Zealand ours are perhaps then likely to be similar. Could the world be in a long Japanese-like slump?
A Property Investors Opinion
For a property investors opinion check out this recent article from Olly Newland on why he thinks it’s a good time to borrow more. He has been reasonably on the money in recent years and his book of a few years ago recommended property investors sell off riskier property assets prior to the housing top and buy some precious metals with the proceeds.Didn’t hear many other property people saying that.
He voices the opinion to borrow more while interest rates are low – which I think makes sense if it is for cash-flow producing property. He goes even further to say consider doing it for your own home solely with a view to adding value. I sit more in the Robert Kiyosaki camp where your own home isn’t really an asset as such. But it’s good to read counter arguments nonetheless.
A Question of Leverage
The obvious big difference between a house and physical precious metals is that having a mortgaged property you have a high degree of leverage so if house prices keep rising the return on your deposit is magnified by this leverage. Conversely if house prices fall you can find yourself owing more than the equity in the house. So this could be argued as a pro or a con and obviously depends upon how much of a bargain of a house you purchased amongst many other factors. Whereas with physical precious metals there is no leverage. Of course you could try and borrow to buy more precious metals or use gold and silver futures for leverage. But that would make null and void the unique property of gold in that it has no counter-party risk, so that is not something we recommend. So this leverage question can be a difficult one to weigh up.
Other Factors to Consider
Some of the other factors to consider are what you are likely to get back upon the sale of a house? How much equity would be left over after repaying the mortgage that you could consider putting into for example precious metals?
Another consideration is what kind of house you would rent and how much less would this be than mortgage, rates, insurance and maintenance costs you pay while owning? If the difference is significant then this could enable some savings, which could be turned into precious metals regularly we suppose.
Rents to Rise?
Rents have certainly risen in Auckland – not so much around the rest of the country though. In Auckland I still think it is cheaper to rent but it certainly is not by the same wide margin it was a couple years back. For myself, having been in the same place for a while it remains cheaper to rent than buy by some way. But if I had to move the odds are I would pay a fair bit more to live in a house of a similar standard. I guess I could downscale?
Downsize or Upsize?
You could also make the downscale argument for owning too I suppose. Sell and downsize by buying something smaller or in a cheaper area, and put some of the proceeds into precious metals. Again there are lifestyle factors to consider in doing this. You could realize a good sized surplus if you were prepared to live in a slum! But would you really want to?
In the article mentioned already Olly Newland takes the completely converse opinion of borrowing more to add value and reduce your debt to equity ratio that way.
But of course this also depends on whether you have the cashflow to support the further debt? As we’ve already mentioned the cost of living continues to rise and wages are very stagnant so the average guy is losing out every year and likely to continue to do so in the medium term.
In the long run rents are likely to return to being more closely aligned to the costs of owning. This could be by rising rents – which will also then eat into any surplus you may have. Or it could be by falling house prices. Obviously falling house prices would be welcomed if you were renting and the complete opposite if you owned.
What About Deflation?
The other consideration is if we slip in to a long term bout of deflation. In this environment cash will be king and gold should hold up okay too if history is any guide. But housing and debt based investments will likely fall considerably. Obviously Bernanke and co are very aware of this and as there is a hint of it at the moment the odds favour them being ready to launch a massive wave of money printing to stop a deflationary depression. So if we had to place a bet it will be on the side of the money printers.
And of course all this is on the supposition that precious metals will continue to hold their value while just about everything else gets devalued. This has been the case for the last 10 years, but as the old money manager saying goes “past performance is no guarantee of future returns”. And while I don’t think that will happen in straight line, as the recent price plunges show, in the long run it still seems a safe bet to me as personally I believe we are slowly witnessing the destruction of the current monetary system.
If you read our articles on the housing to gold ratio you’d notice that 2005-2006 was the best time to sell housing and buy gold, as that was when the ratio peaked. So there is an argument to say the easy money has been “made” in that trade.
Will the Trend Continue?
But we remain confident that the trend in the ratio of housing to gold still has a way to run yet. And in the case of NZ housing to silver the ratio from a historical perspective likely has even further to fall. So personally from a financial perspective for us it clearly makes sense to continue to rent and so we will continue to do so for now. However for someone contemplating the trade of a highly mortgaged house for precious metals now, it is perhaps not quite so clear cut and simple.
As we said earlier it’s tough to make financial decisions in the current environment and not likely to get any easier in the near future. Good luck!
>> See this for the latest update on housing to gold ratio: Gold Ratios Update: Dow/Gold, NZ Housing to Gold, & Gold/Silver Ratio
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