Around the Campfire: Get a deposit together

I’ve recently been shedding a few tears for Generation Rent as I watch the staggering rise in house prices. Generation Rent comprises those young adults (roughly aged between 18 and 40) who, unless they are lucky enough to have some source of wealth, have been priced out of the housing market yet are shelling out a big stack of their earnings on rent. Accumulating enough to put down the necessary deposit – which mortgage lenders regard as your investment in the property, how much you are willing to risk – can take years. Especially if you save in cash, given that bank interest rates are so low.

Put a little away every now and then. And after a few years you may have – still not enough, as house price rises are currently roaring ahead, while the purchasing power of fiat (paper) money continues to fall, thanks to inflation. Would it be better to start saving in gold? The gold price can and does go up and down so it’s not risk-free, but it’s worth considering gold as a savings asset.

Whether that cash stowed away will be enough to put down as a deposit depends on many factors – not least being the price you have in mind for the home you want to buy, and how you save.

House prices have been steaming ahead, up by 10% in May in the UK, following 9.6% in April. They’re pretty hot almost wherever you look. The following chart shows how house prices have risen in major markets, up to the end of June this year.

In the UK, where I live, the typical deposit a first-time buyer needs to put down now averages nearly £59,000 ($82,000), about £12,000 ($16,000) more for a deposit than they would have done a year ago, according to Halifax. The calculations for first-time buyers in the US are more complicated but a 20% deposit avoids having to pay primary mortgage insurance (PMI). PMI premiums can mount up – they range from $30-$70 per month for every $100,000 borrowed.

50 years ago, in 1970, the average house price in a London suburb cost about £5,000 ($7,000) and the average annual salary was about £1,000 ($1,390) a year. The interest rate was 7%. To buy that house would have taken 281.25 ounces of gold at the price of £16 ($22) an ounce. By 1990 the same house would have cost some £87,000 ($120,700) and needed around 395 ounces of gold, at around £220 ($305)/oz. Clearly gold did not keep up with house price inflation between 1970 and 1990.

By 2010, the average house price in a London suburb was £235,000 ($326,000), almost 5,000% higher than in 1970, while the average salary had risen to around £26,000 ($36,000), a rise just half that of house prices – and the gold price fluctuated around £800 ($1,110)/oz. So the same house which took 281.25 ounces of gold in 1970 would have needed almost 294 ounces in 2010. By May this year the average house price in London was almost £498,000 ($691,000) – about the same as around 382 ounces of gold. So in the decade of 2010-20 the London suburb house price more than doubled in fiat money terms; but in gold terms the cost rose by less than 30%.

Like many other assets, timing is everything – prices, including that of gold, go up and down. And no-one knows how house prices are going to perform relative to the gold price over the next few months or years.

And a further factor to throw into the mix is our old friend, a black swan event, something unexpected which might jolt all markets. On that front, the next chart is interesting, as it suggests that in black swan events gold tends to do better than other investments.

My view is that one can never tell when it’s a good time to buy gold; its price is difficult to predict. But I don’t intend to stand idly by and watch the value of my savings dribble away. Buying gold, saving in gold, spending gold-as-money is my personal philosophy, which is why we say ‘Gold is security. Glint its key’.

Till next time,

Jason