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Is Your House Worth its Weight in Gold?

Peter Hemple delves into historical data to find the golden property price ratio in the UK

The gold/house price ratio can be a useful measure for evaluating the relative values between property and gold. Historical data shows that when the ratio hits extremes it is nearly always followed by a correction in the ratio.

In light of the continued decline in most commodity prices, and the fall in both gold and silver prices in the past three years, is the resurgence in house prices pushing the ratio back towards a potential turning point again?

Before we look at the current ratio in the UK, let's first look at the historical gold/house price ratio in the US, as gold is traditionally priced in US dollars.

Looking at the historical ratio from 1975 to 2015, the average number of ounces typically needed to buy a house in the US during that period was just short of 300 ounces of gold. Therefore, waiting for the ratio to move to extremes away from that level would involve shifting your savings from gold to real estate when it only required 100 ounces of gold to buy a house (gold is expensive relative to property) and shifting back to gold when it required 500 ounces (property is expensive relative to gold). This would reflect a 200 ounce divergence from the historical average in either direction.

Assuming that you started with $50,000 of gold in 1975, for no other reason than it is far more of a hands free investment than property, you would have paid $180 per ounce for gold at that time and five years later in 1980 you would have sold gold at around $650 per ounce when the ratio fell below 100, (gold then fell into the $250-450 range for the following 25 years), and bought US property at an average house price of $50,000.

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