18-Year Property Cycle – UK Investors beware

(Update 2024) This week we take a look at the 18-year property cycle. If you are interested in property investment and haven’t heard about this you need to read on.

If you have heard about it, but haven’t heard what the guy behind it is saying right now you probably don’t want to miss this either.

In fact, this might just be the day you became a better property investor.

Not only might the 18-year property cycle be your key to unlocking the property market, it could also be the key to unlocking your future.

It starts with house prices. We all know they go up and down. What we don’t know, is when or for how long.

But hey, that’s the royal we because there are a group of people out there that think they do know.

And according to them, anybody armed with this knowledge can crack the property market and as everybody knows if you can crack the property market you can make serious money.

So, without further ado lets dive in.

Demand vs supply

It all begins with cycles.

These occur everywhere but in business they are usually governed by the laws of supply and demand. If there’s not enough supply prices go up.

It’s not long ago that plumbers had longer waiting lists than Michelin star studded restaurants. And its no coincidence that over the same period pluming fees went through the roof.

In fact, it didn’t take long for others to envy these rich plumbers, so much so that everybody wanted to be a plumber.

In fact, I have a friend who left a well paid job in engineering to retrain as a plumber. And believe me. He wasn’t the only one.

Lots of people sniffing a gold run retrained as plumbers and entered the market.

While I’m pretty sure that worked out great for the first few. For anyone else not so much.

Increased competition lead to waiting lists, prices, and salaries all coming back down to earth with a bang.

It wasn’t long before all these new plumbers were heading back to their old jobs.

But what’s that got to do with the 18 year house price cycle I hear you ask?

Well, it like this. Goods and services should all work in a similar way to plumbing. 

However, the thing is, they don’t.

Some of them have special characteristics. One of which is property. In fact, when you look under the hood it turns out it’s not the actual bricks and mortar that is different. Instead its the underlying land that holds the key.

And this is because land is a finite resource. Whilst you can build more houses, you can’t build more land.

This is vital to understand because it impacts the economy. 

When the economy is on the up demand for all kinds of things goes up too. Property is no different. Boom times bring about an increased demand for new property across the UK.

When demand for property increases developers like to build more. And whilst it should be pretty easy for them to get their hands on more of just about every building material they need, land is a different kettle of fish.

Why land matters

Quite simply, when demand is high there isn’t enough of it to go around. In fact, places where demand goes up the most, usually have the least land. This means the land price can be pushed up to silly levels. 

And because there’s no easy way to increase supply, land prices tend to rise much faster than just about everything else.

Rocketing house prices have a nasty habit of piercing our emotional barriers. The speed of the increase and the implications on our life make it hard to ignore for most people.

In other words, when prices start to increase rapidly the market changes quickly too.

People start panicking. Some rush to buy fearing they will be priced out of the market. Others buy more expensive properties than they would have done to take advantage of capital gains.

Then seemingly out of nowhere speculators appear. These are the guys who buy property with a view to selling for a quick profit.

Somewhere along the line, this all starts to get out of hand as property prices simply become unaffordable for most people.

In fact so much so that it usually leads to a property market crash and then all hell lets loose: 

• House prices drop double digits
• Banks stop providing mortgages
• Builders stop building
• Property developers stop developing
• Companies go bust
• People lose their jobs
• Many default on their mortgage payments
• Some lose their homes
• More than a few go bankrupt
• The odd one never recovers

The only good news is the fact that at some point, everything settles down and it all begins again.

In a nutshell, that’s the 18 year property cycle UK property investors need to be aware of right there.

Cycle stages

The 18-year cycle was uncovered by Homer Hoyt in his doctoral thesis and published as One Hundred Years of Land Values back in 1933 in Chicago.

He was basically looking at one hundred years of data nearly one hundred years ago! That takes us back nearly 200 years!

However, a gentleman by the name of Fred Harrison is probably the most prominent name in the space nowadays. He built on the original work, bringing it up to date and proved its validity in the UK.

Harrison is a British author, economic commentator and corporate policy advisor.

He has done a tonne of research on this, but perhaps his real fame comes from the fact he predicted the last housing market crash. The fact that he predicted the one before that and that both of these predictions were made in books adds to the man’s credentials.

But if you don’t have the time to digest a couple of major works, it doesn’t take long googling to find some of his older articles predicting the 2008 crash, like this.

According to Harrison, many experts talk about economic cycles without understanding the impact land has.

Harrison’s view is that most experts get it so wrong because they think the property market depends on the rest of the economy. He believes they’ve got it back to front.

He thinks the rest of the economy depends on the property market, not the other way round.

According to Fred, there have been three 18-year property cycles in post war years (1956-74, 1975-1992 and 1993-2010).

How can we make money from this?

And here lies the magic. If we know when the last property cycle ended and we know how long this one is likely to last we should make better property investment decisions.

Decisions like when to buy and when to sell and when (not to) panic!

It turns out the 18-year property cycle is actually pretty simple. It works like this. Prices go up for about 14 years and then down for about 4 years.

There’s a bit of a dip after the first 7 years or so and that separates a recovery phase from an explosive phase.

House prices go up more in the explosive phase than they do in the recovery phase. This is especially true for the last couple of years. In fact, this period is known as the the Winner’s Curse because if you buy here you are buying at the peak of the market.

In other words, there’s a massive chance you’ll loose money.

And finally, every house price cycle begins at a higher point than it did before. But that’s about it.

The meat is something along the following lines.

• 7 years of slow house price growth
• Mid market wobble
• 7 years of rapid house price growth (with the bulk of this growth coming in the last couple of years)
• 4 year crash

One complete cycle over 18 years

Source: Money Week

How to invest

This information puts you in a stronger position than those who don’t know about it.

Essentially, you can answer two key questions. The answers to which could be critical to making property investment decisions:

1. How can I make money from the housing cycle?
2. Where in this cycle are we now?

Those are important questions, so let’s deal with them one at a time.

It’s this simple. You can make money from the housing cycle by buying low and selling high and not panicking in-between. And the earlier into the cycle you buy the better for your profits.

The graph above isn’t a perfect illustration but it gives a pretty good idea of what’s going on and when.

That’s just to say that buying in the first 7 years pretty much guarantees you’ll make money. Whilst during the second part isn’t quite so clear, you should do OK as long as you avoid the last 2 to 4 years.

Instead, that tail end could be a perfect time to sell.

The only other piece of information you need is where we are in the cycle now.

Where are we now?

Because we know when the last cycle finished we have a pretty good idea when the next cycle began.

In short, if the last crash was in 2008, then four years out takes us to 2012, by which point we can assume prices start going up so they should continue until 2026 with a wobble somewhere near the middle somewhere.

In other words, according to the theory we should be entering a boom stage right about now (2024).

However, we need to look at what’s really going on the housing market to be sure.

Check out the graph below based on Land Registry house prices:

Reality

Source: Land Registry

According to the Land Registry, it looks like house prices started going up in 20010 (not 2012). And if that’s the case we should expect a crash in 2024 not 2026. That’s this year!

Not only that, but it looks like prices have begun dropping already.

This leads to a few questions.

1. Is this property 18 year cycle exactly 18 years or could it be longer or shorter?
2. Could we be entering the final stage now?
3. Or do we have further to go?
4. Is the cycle broken?

I think it’s worth going into those in a bit more detail. As they are related I’m grouping the first three together.

Is the cycle exactly 18 years?

According to Fred Harrison 18 years is an average. It is based on data going back hundreds of years so it’s probably a pretty good average but at the end of the day an average is only an average.

And I guess that means a 16 year cycle is not out of the question so we could be entering the crash phase already.

At the same time, it could also mean we have further to go.

Is it broken?

There’s also another possibility, which is pretty controversial. That the housing price cycle is broken.

You’d think that would be unlikely seeing as though it is based on hundreds of years of evidence, but who knows really. There are plenty of big things going on this time around like Brexit, The Covid-19 Pandemic, China’s economic woes and wars in the Ukraine and the Middle East.

It’s probably worth just pointing out that the last time the 18-year cycle didn’t pan out occurred around the Second World War.

What does Fred Harrison think?

The good news is Fred Harrison himself has come out and answered the big questions for us.

Quite simply, Fred thinks we are still in business.

He seems pretty sure there’s still a couple of years left to run and that peak price growth will occur to 2026 and that the crash should occur in 2027.

However, that’s where the good news ends.

Just when you were starting to get exited with the real knowledge you need to make property decisions, I’m going to throw a spanner in the works here.

To be fair, it’s Fred that’s throwing tools.

He thinks this cycle is going to be different to the previous ones. And not in a good way.

Nope. He is on record as saying that he expects house prices to crash much more severely than they ever did in the past.

It’s going to be even worse than 2008, 2009.

Fred Harrison

According to Fred, this time is different.

His argument is pretty simple. It’s based on the global nature of the world we live in. Nowadays, global markets are linked so strongly that they act as one. The world is now so interconnected that there’s going to be nowhere to hide when things start to hit the skids.

Basically, all financial assets are going to crash much harder than they did last time around.

Should this influence our decisions

It’s hard to know what to make of all this.

On the one side, we are now armed with more information than we had before. But on the other side it’s not clear what to do now we know what we know.

Do we rush out and buy property now in the hope that we can sell it in a couple of years for massive gains? Should we wait on the sidelines hoarding cash waiting for the crash to come around so we can pick up cheap properties?

They both sound reasonable enough, but then again, if Fred is right we might have other things to worry about when the proverbial finally does hit the fan.

In 2008 plenty of banks, companies and individuals went bust and many never recovered.

Are you ready?

Average drops of 20% across the UK really do disguise what happened to certain property types in certain areas. Plenty of properties had their values cut in half. Plenty of those same properties are still down from their previous highs.

Buying anywhere near the top of the market can be a fatal mistake.

If the end of this cycle plays out like Harrison thinks, the results aren’t really worth thinking about.

For experienced investors in UK property 18 year cycle aficionados can appear more like loonies than gurus. And I must admit, when I first heard about it, I was pretty sceptical.

But after a little in-depth research of my own, including a couple of books, I’m inclined to believe there just might be something to all this.

The bottom line

So there you have it.

The 18-year land cycle pretty much maps out the rise and fall of prices in the property market.

You should be able to use it to make money from the property market.

It points to a boom in property prices over the next couple of years.

The only problem is the guy who knows most about the cycle thinks this one is going to be followed by the mother of all crashes!

Ouch!

Read more about property here.