I believe 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 £231,644 in 2021. That’s a healthy 12,200% uplift!
A closer look at the data reveals a recurring 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 noticed that we are at the start of the explosive growth phase. The accuracy with which current house prices map onto this model is actually a little TOO ACCURATE to be comfortable. My prediction this time round is that we will burn through the explosive growth phase slightly faster than the model predicts. I put this down to the Covid effect, which has served to accelerate government stimulus and the resultant asset price increase. That said, I still believe this phase will run for between 3-5 years, and will see more double digit annual house price growth.
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 speculate 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 and more stretched 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.