One of the functions of money discussed in the AS Level course is store of value. In 2010, after the GFC, gold became a popular as a store of value rather than as an adornment and its price rose from $700 an ounce in 2007 to $1264.90 in June 2010. A similar situation has become apparent in 2016 with property.
New Zealand seems to be seen as the safe ‘store of value’ for overseas investors in that they have purchased a large number of expensive properties in the local market. Although they only account for 3% of all New Zealand properties sold, overseas purchases have focused on properties over NZ$1m which have increased by 21%. This in turn has pushed up property prices nationally by 13%. Other countries have also seen the impact of foreign money.
*London – property prices are up 54% in four years
*USA – Chinese investors have bought 29,000 US homes for $27bn. mainly in San Francisco, Seattle, New York and Miami.
In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income – see graph. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.
In most cases property maintains a good store of value with its intrinsic value. However gold’s main use is for jewelry, especially in India and China, and it has been quite strange that the price should remain so high at certain times without any changes in the fundamentals of supply and demand. Also why has gold maintained such value as a commodity without any real intrinsic value – its price being based on nothing more than a common belief its value is going to appreciate. Much like the tulip bubble in Holland in 1636.