Sunday, 23 September 2012

Evidence that UK house prices have another 3-5 years of falling...

One of the consistent questions I get at my seminars is, 'Why do you think house prices are going to keep falling? What evidence or proof do you have?' Normally these questions come loaded with a lot of passion and cynicism and I can completely understand why. For the majority of people, real estate is a very emotional issue as it's normally the biggest, boldest and most expensive thing one tends to buy in their lifetime. Plus it's an 'investment' which you can live, sleep and eat in. People spend their blood, sweat, tears and talent saving up for a ridiculous 30% deposit these days, then go through the nervous process of handing that chunk of money over to someone they don't know. Then their financial life completely revolves around paying off their mortgage.* So on the whole, your house is the closest thing to your heart next to your pet dog. (On a side note, a couple of times, some individuals have said that real estate is always better than Gold & Silver because you can't eat Gold or Silver! Well, you can't eat your house or stock market shares either, but hey, it's a statement that always makes me chuckle inside).

Now I've always said that I'm not a Gold or Silver bug. I really don't want to own these metals as they have no dividends or cashflow and they're just shiny inert lumps of metal which you have to store and protect. My true aim in the next decade is to acquire as much real estate as I possibly can and I won't stop until I have enough cashflowing properties which will generate at least 3 times my expenses/liabilities per month. So that could be 3 houses or it could be 30 houses. But knowing my penchant for cars, planes, helicopters and extreme sports, I think it's probably going to be nearer the latter.

So going back to the main question of why I think we've got a few more years until real estate bottoms, I'd like to draw your attention to one of the key indicators (in my opinion) which illustrates that we haven't seen the bottom of this real estate plummet. And that is the Silver to House Price Ratio and the Gold to house Price ratio. I believe this ratio is pivotal in decifering when is the optimum time to jump ship from precious metals to real estate and it's vastly overlooked by mainstream economists/analysts/City-hotshots who are (in my opinion) normally incorrect with their economic projections. E.g. Bernanke, Merv King and mortgage advisors with the 2008 real estate bubble and stockbrokers/mutual funds with the 2001 tech bubble!

So below is a chart of this key indicator. In layman's terms, this chart shows you how many ounces of Silver it would take for you to buy an average priced house in the UK completely outright with no mortgage.

As you know, house prices are still falling whilst Silver is starting to really surge in price and as you can see on this graph, the House Price/Silver ratio is plummeting, and has been doing so since 2003.

Also, you can see that back in 1980, you could buy an average priced house in the UK for just 813 ounces of Silver.

So if you were a wealth cycle investor and was simply flipping between houses and Silver, the perfect play here would be to sell your Silver in 1980 and invest heavily into real estate. Then sell your real estate in 2003 for a great profit and invest it into Silver, then wait until this cycle repeated itself again. So by looking at this chart, at current rates, this ratio should hit rock bottom (house price bottom) anywhere between 2013-2015. (I can hear some of you screaming that house prices reached a peak in 2007, not 2003. Well if you are thinking that, you're absolutely correct and you would have realised your peak profit from selling your real estate in that year, but relative to the House/Silver cycle, you'd acquire a lot more Silver by selling your real estate in 2003 as opposed to 2007, thus getting more potential future profits).

Now obviously you shouldn't base your whole investment strategy on just one indicator, but just take a step back for a moment and see what this chart is really telling you. It shows that this ratio is returning back to it's all time low of 813oz, which means that in the very near future, we are quite likely going to see and live in a period of time where you can go out and buy a whole average priced house for just 813 ounces of Silver. So right now, if you were to go out and buy 813 ounces of investment grade Silver (Canadian Maple Leafs/American Eagles) in today's money that would cost you roughly £23 100. Then if you sat on that and waited till the ratio got back down to 813 oz like it did in 1980, (which may happen again in a few years) you would have bought a house for just £23 100. Sounds like a pretty good plan to me. But when you really start digging around in the Gold and Silver world, it doesn't stop there. Due to a myriad of factors, (which you can discover at (, I believe that this ratio won't just stop at 813oz. In a nutshell, Silver reserves around the world are depleted, it's the 2nd most used commodity on the planet, the currency supply has increased by a factor of at least 10 since 1980 and in investment form, there is more Gold than Silver on the planet, and in trading there is a thing called overcompensation of the reversion to the mean. This basically says that things go from over valued to undervalued and so on as it always tries to revert to the mean, but just shoots way past it. So with all of these attributing factors and more, my research leads me to personally believe that this ratio will go down to at least 400 ounces. Which means that within 2-5 years, we could buy an average priced house in the UK for just 400 ounces of Silver which is just £11 400 in today's money (23 Sep 2012). And that is why I am building my Gold and Silver ark. So that when this moment arises and I can buy a house outright for roughly 400-500oz of Silver. Well, you could do that, but I'm personally going to convert half of my Silver holdings into 10-20 house deposits and start building my real estate portfolio. I'll then sell another 25% of my Silver when Gold and Silver prices reach parity and then keep the remaining 25% to lend and borrow against. Some may say this is a risky plan, but I've spent a good 2 years thinking this plan through and believe it's airtight. You simply can't go wrong with owning physical Gold and Silver as it has no counter-party risk and they are money so it cannot crash in price/value in a big way. Whereas your bank can easily go bankrupt taking your cash and savings away, stocks can crash and country's can pilfer your pension pot like we've shockingly seen in Greece recently.

This is the House price to Gold ratio chart. As you can see, it's a very similar story, except that it's all time low was 37oz. Which means that if you waited to buy a house with Gold when the ratio reaches its all time low like in 1980, 37oz of Gold would cost you about £41 000! This in itself is one of the many reasons why Silver is a far better investment that Gold. Historically, Gold has always underperformed against Silver. For instance in 1980, Gold rose by a factor of 24 (which is very good), but Silver increased by a factor of 36.

So there you have it. My main reason why I believe that we've got a few more years of falling house prices and that there's no need to rush around and get on the ladder just yet. The silver lining of this whole topic really is Silver itself.

Hope you found this useful and please email me if you have any questions or if you down right disagree with me. I'm always keen for healthy debate!

* Do you know where the word 'mortgage' comes from? It comes from the French as usual - 'mort' (life) and 'gage' (gauge). So literally speaking, a mortgage is a "gauge of one's life", which is pretty close to truth actually because people tend to spend their whole life paying off their mortgage and after doing so, pop their clogs not long after.


  1. Very interesting. Your rationale relies on all factors remaining constant and no intervening circumstances being thrown into the mix which could affect the price of silver. The basic premise though seems reasonable enough and assuming the silver does get scarcer and nothing unexpected diverts demand I can't see how you could go wrong!

  2. I have spent many months trying to find out what could go wrong, however the fundamentals for higher prices far outweigh the reasons for lower Silver prices. For a start, the US Geological Survey said we have just 8 years of mineable silver left. Also demand is growing at a rapid rate. Especially with Japan ploughing into Solar energy instead of nuclear...