Investing In Shares

Australian House Prices To Gold Ratio From 1880

The debate continues to rage over whether Australian house prices are overvalued or not.

In these debates most people focus on “nominal house prices”. Yet through the magic of inflation and an expanding broad money supply nominal prices can conceal the underlying “value” of any asset.

As is always the case in life – “price” is what you pay; but “value” is what you get; and they are rarely the same.

For example, there wouldn’t be many people willing to argue the point that “house values” in Australia peaked in 2005 and have already halved since then, because the more commonly reported “nominal house prices” have continued to go up.

But this chart of median Australian house prices to gold ratio from 1880 tells a story differently:

Australian House Prices To Gold Ratio From 1880

If the long term bottoms of nearly 140 years of Australian housing history are to be believed, then “house values” could fall another 78% in the coming years, back to the long run lower bound of 80 ounces of gold for the median Australian house!

Before people fall off their chair at the prospect of a 78% correction, keep in mind that if that were to occur I suspect that much of that adjustment process would come in the form of gold price increases and AUD falls.

As such it is entirely “possible” that “nominal house prices” (the ones everyone likes to talk about) could potentially go higher whilst correcting 78% in gold terms, though I wouldn’t have that as the “probable” case.

For those that think using gold as a benchmark for future price expectations for Australian housing is ridiculous, this chart of the last 125 years of US house prices to gold should offer some sombre reflection of housing’s ability to retrace to longer term “values” in terms of gold:

Us House Price In Gold - 1890

Of course you could simply dismiss the US housing to gold ratio reverting back to its long term lower bound as isolated to the US economy because what happened in their housing market was “clearly a bubble” and “everyone could see that” and “Australia is different”…

But that position would be undermined by reviewing Japan’s housing to gold ratio and notice a similar pattern (gold price in Japanese Yen) (sorry I don’t have data from further back than 1975):

Japanese House Prices To Gold Ratio From 1975 v3

What about the UK house prices to gold ratio (gold price in GBP)?

UK House Price to Gold RatioYep same again in the UK.

Ireland and the Euro?

Ireland House Prices to Gold Ratio from 1979

Would you believe it? They have all revert to trend as well!

So why haven’t Australia’s property prices reverted to the lower bound trend yet?

In a word; China.

China has yet to unwind its credit bubble and because our economy (exports) have become more dependent on China (and Asia) over the last two decades their strength through the GFC prop up our economy and asset values.

But will that continue?

I don’t think so.

Here’s Hong Kong’s apartment price to gold ratio (a good proxy for China’s tier 1 cities for which there isn’t as much backdated data):

Hong Kong Apartment Prices to Gold Ratio from 1982That’s right! In mid 2015 it cost over 2000 ounces of gold for a 100m2 apartment in Hong Kong (up from 250 in the 1980s)…

So China is the REAL bubble that needs to pop.

On the plus side it makes our domestic housing bubble seem rather minor in comparison.

That said, as with all bubbles it’s all fun until it ends, but it would appear that Hong Kong property has already rolling over rapidly…

Whilst not shown in the above graph HK property prices have already fallen 13% in HKD terms since September 2015 and gold in HKD is up 14% over the same period, but I suspect this is just the beginning and a China bust will take the Australian property back to its longer term lower bound with it. …

All is not lost, the way I plan to (and have been) playing this scenario is go long Australian exporters (particularly gold miners) given the AUD will likely continue to fall and short companies associated with property and finance (ie banks, real estate agency, mortgage insurance, etc).

Remember I’m just one man trying to make sense of it all to best position himself for the future, be sure to do your own research and take your own circumstances into consideration.