A year ago we wrote an article called “Could NZ house prices drop by 80%?” Well since we wrote that in February 2010 they’ve actually dropped well over 20%. Surely we must be wrong you may think – given all the articles in the mainstream media you read, talking about how house prices have held up pretty steadily even in the face of very slow sales.
Well the price may not have dropped in NZ dollar terms but rather in terms of how many ounces of gold it now takes to buy the median New Zealand house.
If you haven’t read the previous article it might be useful to do so first as we explain the concept of pricing housing in ounces of gold. In that article we also compared the NZ housing to gold ratio to both the USA and UK housing to gold ratio numbers which went back much further than any NZ statistics we could find.
This concept of pricing things in gold can take a bit of getting your head around. The thing to consider is that while the gold price quoted appears very volatile, it is actually the paper money currency that is varying. Gold is steadily buying more and more while paper currencies are steadily buying less and less.
Just look at oil and food prices of late. Thinking of everyday goods in terms of how many ounces (or fractions of an ounce) of gold it takes to buy them can be a revelatory way of thinking.
Anyway, here’s the updated chart showing the NZ Median House Price to Gold Ratio. The chart shows the median NZ house price divided by the current gold price per ounce in NZ dollars (black line). It also has the median NZ house price (red line). When we wrote the last article the ratio was at 259 ozs of gold as of September 2009. Since then it has dropped down by almost 25% to 195 as at December 2010. (Note: Housing index data is quarterly hence we are always a bit behind). As you can see the median house price (redline) has not really changed much at all in that time – just varying by a few thousand either side of $360,000. People sitting on the sidelines holding cash waiting for the inevitable house price drop may have been disappointed as it hasn’t really eventuated.
However if you’d held gold since then you could now buy the median NZ house for 195 ounces of gold with 64 ounces of gold left over. At today’s prices that’s NZ$123,968 you wouldn’t otherwise have had. Much better than 3% interest in the bank – about $13,500 on $360,000 over 15 months by our calculations. Granted that involves some timing, and a year is perhaps too short a time frame to hold gold anyway given the costs to buy and sell.
So the ratio is now as low as it’s been since the early nineties. Does this mean it’s a good time to sell gold and buy housing? Have you missed the boat?
As mentioned in the last article it’s worth looking at the end of the last gold bull market in 1980 for comparisons sake –albeit with the “past performance no guarantee of future returns” proviso. In 1980 the median NZ house could be bought for just over 50 ounces of gold! (Hence our 80% drop figure from 250 to 50).
Who knows whether it will reach this level again but if it does that’s a lot more house (or a lot more houses) for your ounces. Personally I’d keep an eye on around the 100 ounce mark as a possible point to swap one asset for another. Around this time some of the other factors in our article “When will you know it’s time to sell gold”, could also be appearing. So the ratio has now dropped from about 500 ozs to 200 ozs currently – a fall of 60%. If it fell from here to 50 ozs that would still be a drop of a further 75%. So if history is any guide, potential to buy a house cheaply still remains.