You may have noticed a recent surge in the number of commentators/articles/blogs making note of Australia’s housing bubble. Jeremy Grantham (US Investor and co-founder of global investment management firm GMO) said in an interview earlier this year that prices would need to come down 42% to return to the long term trend, The Economist magazines latest global survey found that Australian property was 61% over valued, even Mike Shedlock (or Mish, registered investment advisor representative for SitkaPacific Capital Management) has mentioned that Australia’s housing bubble exceeds that of the recently collapsed US bubble.
There are several measurements we can look at to gauge whether house prices are over valued or under valued. The Economist has used a measurement of purchase price vs rents, Jeremy Grantham used price vs multiple of income and this blog takes a brief look at house prices measured in Gold & Silver.
The Perth Mint is a fantastic resource for historical prices on Gold and Silver, not just in AUD but several major currencies. For the purpose of this comparison I used the monthly data provided by the Perth Mint (AUD, ASK, Average). I averaged the monthly data over each year* to provide an annual figure which I then divided into the median house price in each of Australia’s capital cities to obtain the number of ounces (of Gold/Silver) required to purchase one. The averaging of Gold/Silver prices over 12 months smooths out any unrealistic ratios caused by large spikes in the Gold/Silver price like the one in early 1980. For example in 1980 Sydney's median house price was $68,850 if we divide that by the average Gold price for the year ($541.88) we get a price of 127 ounces, if we use the average price of Gold for the month of January 1980 ($610.99) we get a price of 112 ounces and if we divide by the daily price on 21st January, 1980 ($752.50) it would only cost 91 ounces of Gold to buy the Sydney median. Realistically you aren't going to be swapping your Gold into property at the height of such a spike, so using a yearly average makes sense.
In 1980 you were able to purchase a median house in any Australian capital city apart from Sydney for under 100 ounces of Gold. How have prices tracked since? The below chart shows the Sydney and Melbourne medians priced in ounces of Gold for the last 35 years:
Figure 1 (Sydney)
Figure 2 (Melbourne)
As can be seen in Figure 1, Sydney soared to an incredible 987 ounces of Gold in 2004 (from 127 in 1980), it corrected to less than half that price between 2004-2009 (987 to 425) and currently sits around 468 ounces. Melbourne rose to a height of 597 ounces in 2004 from a low of 72 in 1980, corrected back to 346 in 2009, but with strong housing growth in early 2010 this has seen the median Melbourne house jump back up to 422 ounces of Gold.
It's also interesting to note the contrast between the Silver/Gold ratio over the last 35 years and how that affected housing priced in Silver. Using the average figures for 1980 we saw a ratio of 1:27 (Gold:Silver),while today's ratio stands at 1:61. This means that housing is even more overpriced in Silver today than it is in Gold. During 1980 in Melbourne, Brisbane & Adelaide one was able to buy a house for under 2000 ounces of Silver. 2000 ounces of Silver today wouldn't even cover a 10% deposit in any of these cities. Even before Silver started it's parabolic run when it was priced around $3.75 to $5.25 an ounce (1975-1978) it still only look 6000-8000 ounces of Silver to buy a property in those cities, whereas today it takes around 22000-27000.
There is plenty of room for Gold/Silver to increase against the price of houses and still maintain a reasonable ratio. Will we once again be able to buy a median house with 100 ounces of Gold or 2000 ounces of Silver? Only time will tell.
* For 2010 the first 6 months were averaged
# Note that $ figures quoted are AUD based prices
Disclosure: Position held in Gold & Silver. Not investment advice. Do your own research.