Real estate has a lot of money, but like many markets, it has some trends that some find concerning. One of the most major is the 18-year property cycle, a pattern in which the market tends to boom and bust every 18 years. But what if we told you there was a way to profit from the cycle as a business owner in the retail sector?
In this article, RealBusiness will detail how this is done, why the cycle starts in the first place, and how best to protect yourself.
Table of Contents
What Is The 18-Year Property Cycle?
Fred Harrison is a British property economic commentator whose theory around the 18-year property cycle rose to prominence after uncovering it through extensive land and property analysis dating back for centuries. He found that property prices rise and drop dramatically in 18 years, and he attributes it to a range of factors. He gained further popularity when he predicted the property market crashes of 1990 and 2008.
Some do not believe his theory to hold water, however. The most common claim is that his prediction is simply too simplistic, and his use of historical data is flawed considering the difference in conditions between now and then.
Modern property investors and some homeowners now learn the theory in an attempt to predict future price changes. There is an increased chance of making more profits when you know the likelihood of an increase or decrease in house prices.
Why Does The Cycle Exist?
The truth is, nobody truly knows for sure, but one thing is clear – house prices grow too high for their prospective buyers to afford. Nonetheless, here are theories:
- Economic cycle – Interest rates increase over time, lack of available credit, and lack of confidence in consumers.
- Demographics – Growth issues in population.
- Government policies – Regulations, subsidies etc.
The truth is, that a residential home is a lot of money, and a lot of different factors clash when determining worth. This shows the uniqueness of the property cycle and why it is vital knowledge for every serious property investor.
The Four Stages Of The Housing Market Cycle
There are four stages within the housing market cycle:
- Crash and Recession Stage: At this stage of the property cycle, house prices fall at a gradual rate. Typically, this is due to interest rate increases, too much borrowing and a downturn in the economy. The crash and recession phase takes place within four years and typically comes alongside falling property prices and increasing unemployment rates.
- Recovery Phase – Recovery lasts for around seven years, happening right after the crash and recession stage. House prices begin to increase due to the newfound low property prices and interest rates prompt buyers.
- Market Correction – The phase of stabilising house prices on the property market is called the Market Correction stage. A market correction is caused by factors such as increased regulations, a rise in interest rates and a positive economic slowdown. It lasts an average of two years and it’s a period where the confidence levels of investors remain boosted to buy properties. There is also a slower rate of price changes and lower unemployment challenges.
- Boom Phase – The last stage of the property cycle is the boom phase when house prices skyrocket. The rapid price changes are caused by a combination of socioeconomic factors. These include lower interest rates, easy credit and high demand that triggers a surge in pricing. An average boom stage lasts about five years and sees investors become confident in purchasing properties again.
When Is The Next Crash Due?
The next major house price crash is due in 2025-26 following the conclusions from the last four crashes in 1953-54, 1971-72, 1989-90, and 2007-08. The popular theory among economists and property experts is that a crash might happen based on the property cycle theory.
Their probable contributing factors are Brexit and the over-valued property prices. Some have also cited the impact of the COVID-19 pandemic as another significant factor that could trigger the crash since it decreased the demand for property and negatively impacted the economy.
Where Are We In The Current Cycle?
We are presently in the boom stage if you compare it to the observed trends of UK house prices. House prices are already rapidly rising since the pandemic era and we can expect it to close around 2025. Hence, the prediction of a house price crash but there is no certainty that the property cycle trend will repeat the exact pattern.
As time goes on, more information is revealed through analysis that may debunk the idea of an incoming major house price crash. For one, the last four crashes had unique factors contributing to the phase shift, from decimilisation to subprime mortgage liabilities. This was unknown at the time.
That being said, there are plenty of unique factors today that may aid in triggering the dreaded property market crash. The current wars happening in the Middle East and Eastern Europe, for example.
How Can You Use The Cycle To Make Money?
The 18-year property cycle can make you money if you use it to accurately predict the right time to buy and sell a property. The right time to buy, then, would be at the very end of the supposed upcoming crash. This means that when the crash begins, house prices will crash to stunning lows within four years.
Investors should also be aware of the mid-cycle dip, a phase where property prices stabilise or drop slightly, offering another opportunity to buy. Imagine an investor who bought a property in 2009 during the crash and sold it in 2013 during the recovery. That investor would have made massive profits.
Investment and studying price patterns is a risk but the property cycle predicts selling any property during the present boom stage before the impending crash. You can make more informed decisions when you perfectly understand how to use the theory to buy and sell.
Is The Cycle Guaranteed To Repeat?
There is no guarantee that the 18-year property cycle will happen the same way, but it can be useful to make the best market decisions in property markets. The theory provides a framework to identify opportunities to sell and buy for optimal profits.
You should also understand the factors that contribute to the duration and impact of each stage. The primary ones are economic conditions, demand and interest rates. While the cycle might not exactly repeat itself, we expect it to follow a similar pattern.
What Are The Risks?
Like with any other investment, there are risks with using the 18-year property cycle to make business decisions. One of the common risks is declining house prices, which can significantly impact the value of your investment. The common risks are market volatility, interest rate changes, political/economic instability and the possibility of negative equity.
The best business strategy is doing a risk assessment when investing in a property together with observations of the property cycle. It helps to make excellent decisions on which investment is right for you.
Other Tips For Making Money From Property
Learning the 18-year property cycle is not enough to make more money as a property investor. There are other crucial steps to take such as:
- Researching the local market: Check out the prevalent selling prices, the local economy trend and the prospect of that local environment. Consulting with local estate agents can provide valuable insights into the market conditions and prevalent selling prices.
- Investing in buy-to-let: This strategy involves buying a house property to rent it out to tenants.
- Developing properties: Consider developing properties and not only finished ones.
- Flipping properties: You can make considerable profits if you are great at identifying undervalued houses that can be improved.
- Getting a mentor: it is a great idea to have a mentor if you are new to the property buying and selling space. Having a successful investor as a mentor prevents you from repeating common mistakes.
- Using leverage: leverage is to borrow money from a lender and invest the money into a property. It is a business strategy that can help to maintain a safe profit or loss margin if property value or market demands fluctuate.
- Buying property abroad: experienced investors are those who look beyond the opportunities available in their local market. Buying properties abroad is an excellent way to get profitable returns on investment since you identify less competitive market spaces.
There are many options to making money as a property investor but you must be willing to conduct proper research and a detailed risk assessment.
Conclusion
The 18-year property cycle is a useful theory for property investors to study market patterns and predict the best times to buy and sell in the UK property market. Doing that effectively would maximise profits but be advised that the market does not repeat the exact patterns every time. You must constantly remind yourself of the possible risks just like any other industry.
Property investment is a lucrative business that can make you rich if you follow the right strategies. Do your research, study the market patterns and calculate possible risks before investing your money.
