In Richard III William Shakespeare has the almost-defeated Richard declaim “A horse, a horse! My kingdom for a horse!” If the play were written today Richard might well cry “My kingdom for a house!”
House prices more or less everywhere have rocketed under the pandemic. The suggestion that annualised inflation is currently running at less than 5% in the US and will only hit 3% (only!) in the UK this year seems considerably mistaken, at least for anyone trying to buy a home. The US National Association of Realtors said last week that the median price for sales of existing homes was up almost 24% year-on-year, reaching $350,000 for the first time. In the UK, house prices are rising by more than 13% a year.
Fifty years ago, according to US Federal Reserve Economic Data, it would have cost you about $24,000 to buy a mid-point house in America. The price of gold that year was $35 an ounce, so you would have needed around 686 ounces to buy that house. By the first quarter of 2021 that same house fetched $347,500, and with the gold price hovering around $1,780 an ounce you would need about 195 ounces to buy it. So that same house has gone up in price more than 14 times, while gold has risen by more than 50 times.
Meanwhile since 1970, the purchasing power of the US Dollar has continued to drop, thanks to an inflation rate averaging 3.87% a year, meaning a cumulative price increase of almost 600% compared to 50 years ago. To buy that $24,000 house in today’s Dollars you would need around $168,000; today’s Dollar buys you just 14.41% of what it would have done in 1970.
In hindsight — and who has that? — it clearly would have made sense to have stashed away gold in 1970 to buy a house, for your offspring if not for yourself, today. No-one can tell if the next 50 years will see a similar rise in the gold price. And the housing market boom may in any case have a bust. Much of the exuberance in the housing market is due to the Federal Reserve spending $40 billion a month on buying agency mortgage-backed securities. There’s been plenty of talk about how this needs to be ‘tapered off’; but taking away that support from the market could well trigger a bust, the impacts of which would ripple through the economy.
The previous boom in house prices ended very badly in 2008, when the over-leveraged sub-prime mortgage market hit the buffers; US homes lost an average of almost $100,000 at the peak of the 2007–09 recession, and slower economic growth cost the US economy around $650 billion.
In 2020, the national house price-to-income ratio in the US hit 4.4, the highest level since 2006. In the UK, the least affordable place to live is Westminster, where the house price/earnings ratio is a staggering 25.5 ; the average is 13.38. In Moscow it’s more than 21. Across the planet it’s become very expensive for new buyers to step onto the housing ladder.
The global Covid pandemic has wrought many changes to all our lives. One of the more easily-overlooked is how it has introduced a new social divide — between those who own their own home and those who can only dream of that. Far from being Covid being a “great leveller” some think that “it seems likely that institutional responses to this crisis, [Covid] including fiscal ones, will be shaped in such a way that inequalities may be further sharpened, as was the case after the 2008 crisis”.
“I’m not happy about house price increases because real estate is the surest indicator, the most compelling leading indicator for… a crash”, said Adam Posen, president of the Peterson Institute for International Economics.
History threatens to repeat
Essentially the 2008 financial collapse, which started in the US, was caused by too many people taking on loans they couldn’t afford, and mortgage lenders relaxing their credit checks. Money was cheap — the then chairman of the Federal Reserve, Alan Greenspan, had cut interest rates in 2001 to 1% in order to buoy-up the economy following the explosion of the dotcom bubble.
But the problem started years before that — in the late 1990s, the Federal National Mortgage Association, or Fannie Mae, started to make home loans accessible to borrowers with a lower credit score. Fannie Mae wanted everyone to attain the American dream of home ownership, regardless of credit.
Borrowing costs are again cheap today. Governments have piled on debt and eased credit costs. Their collective debt has surpassed $277 trillion, which is 365% of global gross domestic product. The World Bank says that every percentage point beyond government debt above 77% of GDP cuts 0.017 percentage points from annual growth. That translates into about 5% lower global growth than might have been expected had debt been restrained to a maximum 77% of GDP.
Speculative investors have once again returned to the US housing market. Robert Kaplan, president of the Dallas branch of the Federal Reserve, said last week: “What we’re seeing is more often than not these days, the winning bidder in many of these house auctions sometimes is not a family. It’s a post office box in Delaware, which is an investor who’s never seen the house, wants the house furnished and is going to buy it for investment purposes and rent it”. Big corporate investors have cottoned onto the fact that Americans want homes; that renting is the only option for many who can’t amass the necessary deposit; and that real estate is one of the few sectors to benefit from the pandemic’s unusual repercussions, such is the desire for more space and good working-from-home facilities.
One must hope that Jerome Powell, the chairman of the US Federal Reserve, knows more than we do. He put on the record last week that it is “very, very unlikely” that we will see a return to 1970s-style inflation. “I don’t expect anything like that to happen”, he added. In saying that the recent inflation spike is ‘transitory’ he joins the heads of some of the world’s other leading central bank. Christine Lagarde, president of the European Central Bank (ECB) said last week that there were “no strong signs of a credit-fuelled housing bubble” in the euro area as a whole. She’s not looking at the data we see, obviously.
The pace of house price rises — they went up more than 9% in Germany in the first three months of 2021, year-on-year, the biggest jump since 2000 — are a sure sign of an asset bubble. Powell, Lagarde and the rest may be relaxed about it, but the rest of us can’t afford to be so. When it pops open like an over-ripe tomato will Powell do a Greenspan, and lamely say “I really didn’t get it until very late”? If a house price bubble burst happens and ripples through the wider economy, will central banks yet again borrow trillions to try to prevent yet another downturn? And who will carry on lending to a US government which already owes more than $28 trillion?
Tricky times indeed. Everything is starting to feel a little precarious. That’s why we advocate holding some real, physical gold; a speculative investment, true, which can and does go up and down in value, but with Glint you can at least use gold as money. And unlike the Dollar, it’s purchasing power has only improved in the last 50 years.