Gold to real-estate ratio

The gold to real-estate ratio shows the relative value between gold and real-estate, and can be used by some as a quick way of visualising which of the two is currently under or overpriced. The gold to real-estate ratio indicates the number of ounces of gold needed to buy the average UK house.

Both gold and real-estate are seen as alternative physical assets to stocks. Both offer tangible investment choices, but as discussed in our gold vs real-estate article, property has seen its potential value decrease in recent times. In the majority of cases, gold outperforms property, while proving a much less stressful investment choice.

How many ounces of gold do you need for a house?

Based on the national average house price for 2020 (£216,092) and the gold price at the start of the year (£1,185.88 per ounce), we get a gold to real-estate ratio of 182.22. This means that as of 2020 you need over 182 ounces of gold for a house in the UK.

The chart below shows the gold to real-estate ratio since 1975:

The ratio peaked in 2005 at 676 ounces, with house prices skyrocketing while gold was nearing the end of a prolonged bear market. The average in that time was 264, and since 2011 – when the gold price peaked during the financial crisis – the ratio has remained below this average level. This demonstrates that the gap between the two investment vehicles has closed. Gold has remained popular, and high in value as a result, while house prices have failed to keep pace – rising, but at a slower rate.

It should be noted that the usefulness of the gold to real-estate ratio is questionable. Unlike gold and silver, property is a significantly different asset that moves independently of precious metals. Gold will tend to perform well during financial crisis, while house prices tend to drop. Whereas the gold-silver ratio can indicate a buying opportunity for either metal, it is difficult to draw meaningful conclusions from the gold to real-estate ratio.

The normal conclusions of ‘expensive’ and ‘cheap’ are subjective. The current ratio of 182 would suggest that gold is ‘expensive’ and, considering it is near all-time highs, this does make sense. However, for the ratio to increase towards the long-term average, gold would either have to decrease in value, or house prices increase in value.

Global uncertainty is high, which makes a significant drop in the gold price unlikely in the short-term. House prices have been rising during the pandemic, spurred by a stamp-duty tax break by the government, and an increase in demand for larger, rural housing due to remote working. New builds also slowed during the pandemic, while supply chain issues see house costs rising.

As such, while an interesting comparison it is certainly not recommend to read to far into the gold to real-estate ratio.