The price of a real estate in gold

The Daily Reckoning has a chart showing that nominal gains in housing since 1913 has been in the neighborhood of 4.4% per annum.  Take the following example:

5561 Keith Ave Oakland, CA  1913- $5,750; 2011 ; $843,500.  = 14,595%

But what happens if we price the house in gold which was $18.93 per ounce in 1913 and $1435 today ?

5561 Keith Ave Oakland, CA  1913-303 oz gold ; 2011-587 oz gold = 93%

That’s on the high end of the scale.  Suppose we took another house on the low end:

28 Sanford St. Trenton NJ  1913-$3,600 ; 2011 $200,500 = 5469%

28 Sanford St. Trenton NJ  1913-190 oz gold ; 2011-140 oz gold = -26%

The nominal gain in the 28 Sanford house over 100 years was 5469%, but the real gain as measured in gold is -26%.  This is a remarkable consideration.  In my view, what it really means is that those investment advisors (e.g., James Altucher) who say that buying a house to live in is not an “investment” have been absolutely correct.  It is likely a relatively good store of value, as compared to the dollar, but even that really depends on the location of the house.  If a house is bought in a thriving industrial metropolis but ends up in a ghost town like Detroit, real estate is a very bad investment indeed, in the long run.

I would contend finally that home owners often win in this game because they have access to a low interest debt product, a mortgage.  The interest paid, the maintenance on the house, insurance and property tax, the main expenses of the house, are roughly equivalent to or less than what one would pay in rent.  The significant advantage of borrowing a large sum today and paying it off over the course of time is that the dollars borrowed are worth more than the dollars paid, because inflation, which has been more common than deflation over the last 100 years, benefits debtors.

But real estate as an investment gives the impression of phenomenal gains; but as measured in gold, these gains are far less dramatic.  However, in some cases, owning a home may protect the investor from robbery via inflation.

Just for fun, I’ll do the same with my house:

Price paid in 1997 = CDN $200,000 ; 2011 – CDN$400,000 = 100%

Price paid in 1997 = 404 oz gold; 2011 = 287 oz gold = -29%

I conclude that my house has had phenomenal nominal gains in the last 14 years, but no serious real gains in that same period.


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