What is the 18 Year Property Cycle? It’s a term that gets bandied about by experts a lot. But first, let’s take a step back: what even is a ‘property cycle’? Well, this refers to a recurring economic sequence. Historical analysis shows this sequence is characterised by four principles: depression/downturn, recovery/upturn, boom and recession. Lots of factors can influence where in the series we are, and drive the boom-bust cycles. These include general market sentiment, confidence, scarcity and liquidity, media commotion, supply and demand, social and political issues, and more.
The 18 Year Property cycle theory was developed by economist Fred Harrison, who studied over 300 years of data in order to discern a pattern. This pattern, according to Harrison, consists of 14 years of stability or growth in house prices, with 4 years of recession.
The 14 years can be further divided down into 7 of slow, steady growth, mid-cycle recession, and 7 years of rapid growth. Because land is finite, as demand from business and for households increases, prices are driven upwards. Once property becomes unaffordable for the majority, we hit the downturn. It’s particularly dangerous to buy during the final 2 years of the 14 year upturn/stability stage – a price crash and four years of downturn follows directly after! Some theorists cite these year-lengths a little differently, with the overall cycle often being thought of as anywhere between 15-20 years total. Regardless, the features are the same.
Given all this, it should be noted that the mid-cycle downturn/recession is a great opportunity to capitalise through investment, as is the 4-year downturn period. Note too that when the newspapers tell you not to invest, that’s probably also a good time. Influencing public opinion can have profound effects on the market. ‘Herd investors’ will shy away at these reports – it can mean an opportunity to depart from the crowd and profit accordingly.
The upturn or recovery stage is the time in which profits can come home to roost. Often, this begins very slowly, and it may appear as though the media takes a while to notice. Optimism tends to settle in at this point, and low interest rates accompany this period. Those looking to flip property, or first time buyers who are over-keen, may sell at this point. There’s an optimal point at which to sell, and this usually means hanging on a little longer – when the boom phase sets in.
Hype and extreme optimism at this stage usually means that everyone wants in on the action, and buyers often over-spend to get in on the property action. This pushes prices up even further. It can be precarious to predict this period, but it’s your last real chance to sell high before the inevitable next stage… the ‘bust’ phase!
By all accounts, we are currently in an ‘upturn’. Which doesn’t mean investment with the possibility of good returns isn’t possible – bargains are always there to be found, particularly in the northern powerhouse. This is the opportunity to focus on local economies and recognising one-of-a-kind chances to buy. Good local knowledge comes in particular use here, and recognising smaller areas on the rise will differentiate the novice from the expert property investor. As ever, think local, do your research and seek out unique chances to score bargain property – it’s your best bet before the next general downturn!