NZ Housing to Gold Ratio: Could NZ House Values Drop by 80 Percent?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

nz_house_prices_to_gold_price

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

uk-housing-versus-gold

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

us-housing-in-gold

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962.Both peaked around 1970 at near to 300 ounces.Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

nz_house_prices_to_gold_price

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005.So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz.With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over.Or put another way you could now buy 2 houses.That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold.If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis.That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over.Or using the same analogy as above you could now buy 5 houses!Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued.For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ(i.e. $360,000 / 50 = $7200).Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly.With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces!Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising.For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

  1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
  2. Since then it has fallen 50%
  3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
  4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces.This is a further 80% drop from today’s ratio of 250 ounces.
  5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
  6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box below.

Update: Here’s the latest on the NZ Housing/Gold Ratio… NZ Housing to Gold Ratio update March 2011

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