Updated: Aug 19, 2018
There is no end of conjecture surrounding UK property prices. The bottom line is that nobody can tell you with absolute certainty what is going to happen to house prices. That said, there are clear indicators as to what the market is likely to do and if we consider the past as a fair indicator of the future, then we can make smarter property investment choices.
"History doesn’t repeat itself, but it rhymes" Apparently Mark Twain never actually said that, but it is often attributed to him and I think it’s true.
The 18-Year Property Cycle
I believe that the 18-Year Property Cycle is one of the most important concepts to understand in order to succeed in property investment. So, what is the 18-Year Property Cycle?
All markets, be it goods, services, stocks or shares are subject to the forces of supply and demand keeping prices roughly in balance. If the price of cars becomes unaffordable, people will buy fewer cars, car manufacturers will be left with a surplus of stock and will be forced to lower their prices in order to sell more. The resultant drop in prices will lead to an upsurge in car purchases, which in turn will lead to a scarcity of cars for sale and an increase in price and so the market self-regulates. Three cheers for capitalism. A crude example perhaps, but you get the point.
With property, things are a bit different. Land is a finite resource and this is especially true in a smallish and heavily populated country like the UK. It is not possible to manufacture additional land on which to build more houses. Add to this the fact that consistent governments have failed to build enough new homes to meet the needs of an ever-growing population, and you begin to see that continued and increasing scarcity has pushed prices upwards for many generations.
The Nationwide Building Society House Prices Data going back to 1952 shows that the average UK house price has risen from £1891 in 1952 to £211,792 in 2018. That’s a healthy 11,200% uplift!
A closer look at the data reveals a re-occurring trend of roughly 18 years. We can see steady growth in the periods directly following 1955, 1975, 1993 and 2011. We can identify regular mini-dips in house prices followed by explosive growth in 1961, 1981 and 2001. And we can view this as a whole as shown in the graph below. The economist Fred Harrison was one of the first to identify this trend, by looking back over 100’s of years of data he identified an average cycle length of 18 years.
Despite there being some fluctuation in prices over the course of the 18-year property cycle, the overall long-term trend is clearly upwards. Take some comfort from this model and DON’T be misled by what you read in the mainstream media, who’s main priority is to stir up controversy and sell content. And don’t take the time periods indicated in this model too literally, this cycle might last 16 years, it could take 23… but the principles and main phases remain the same.
So where are we now? Well, the smarter amongst you may have already identified that we appear to be right in the middle of the mid-cycle dip (2018).
Why does the property market behave like this? When the British economy is booming there is extra demand for homes, shops and factories which pushes prices up. When investors can see the prices going up, they begin to specualte on the property market in the hope that it will go up further. This tends to push house prices upwards faster than wages can keep up. Housing affordability becomes more a more strecthed until eventually a housing ‘bubble’ is created (see 2005/6). At a certain point prices become unsustainable, the banks withdraw lending and the market crashes.
The 18-Year Property Cycle considers the UK as a whole, but within the UK there is considerable regional variation, not to mention variation within the regions themselves. London and the South East recovered very strongly in the period 2011-2016. With prime and super prime London recovering even more aggressively during that period. From 2016-2018 London has shown very modest (1-2% annual growth) with the super prime areas seeing price drops as high as 10% in some cases.
Prices tend to increase sooner, faster and stronger in London and other affluent parts of the South East. The Northern counties of Lancashire and Yorkshire reported very little growth from 2011-2016, but since then prices have begun to kick on, emanating out from the major cities such as Manchester, Liverpool and Leeds.
I would suggest that whilst the 18 Year Property Cycle holds true for the country as a whole; for London and the South East in the current 18 year cycle you should actually switch the steady growth and explosive growth phases around to get a more accurate picture.
So what next for UK house prices?
My predictions as follows;
London and the South East: Another 18 months of very low level (1-2%) growth, followed by a sustained period of steady growth lasting 5-7 years.
Everywhere else: Accelerating growth for next 7-9 years, until the next inevitable crash happens.
If you’re interested to learn more and stay informed I recommend you get yourself on the monthly Hometrack UK cities index email list.
I have barely scratched the surface in terms of regional variations in house prices, if you want to dig a bit deeper, I strongly recommend you get familiar with the house price heat maps which you find on Zoopla and Rightmove.
Or head to the Land Registry website if you want even more detail.