Cyclical graph of 18 year property cycle house prices rise and crash

What is the 18-Year Property Cycle (and how can you use it to your gain?)

With the right knowledge, you can make a lot of money in property. So how do you do it? One of the best tricks in the book is using the 18-year property cycle as the foundation for your investment decisions. In fact, this is what many property investors do!

In this article, we’ll dive into why the property cycle is so important and how you can use it to your advantage.

What is the 18-year property cycle?

Before we carry on, let’s go back to basics for a moment. To really understand how to use the property cycle, you need to know what it’s all about.

Fred Harrison, a British real estate economist, developed the theory after examining hundreds of years’ worth of data. According to his research, housing prices change repeatedly and predictably over time. He concluded that the average length of a complete cycle was 18 years, with each cycle divided into different phases. Since its discovery, the cycle has been expanded on by other economists and is now used to try to predict future house price movements.

How does the property cycle work?

The 18-year property cycle consists of four stages:


+ Crash – House process have fallen.

+ Recovery – House prices slowly begin to rise

 + Mid-cycle Dip or Correction – House prices begin to stabilise

+ Boom – House prices go up rapidly

We start at the crash and subsequent recovery – house prices are low at the end of a recession, low enough to tempt some brave investors to start buying. It’s a risk, but smart investors will take advantage of the lower prices. Most investors will be notably absent from the market, and some may even be forced to sell.

The trouble is, no-one knows when the prices have hit their lowest point, so those whose portfolio hasn’t stood the test of a recession may panic-sell. In the background, slow, steady growth will begin as people recover from the crash and trust in the market is rebuilt. You’ll find larger companies starting to snap up prime assets, especially in the bigger cities.

Next is what is known as the mid-cycle wobble, dip or correction. This is where prices stabilise, stop growing or even dip a bit before an aggressive second rise.

We then enter a stage of rapid growth, where confidence turns into overconfidence. As prices soar through the roof, demand is high, and banks are starting to lend again. Amateur investors start buying at any level, with properties in all conditions going for their asking price.

The problem is – it can’t last. Prices become unsustainable because wages aren’t rising as swiftly as house prices. As the economy grows so does the demand for properties, domestic and commercial. Eventually, the inevitable happens – another Crash. The cycle begins again.

This might seem like a random series of events, but it’s not. There is a reason why, when, and how it happens. So really, prices rising and falling is natural; it’s nothing to panic about.

So why does it happen?

The main reason being that land is not an infinite resource. In other words, you can’t make more land! In heavily populated areas such as cities for example, this extremely evident.

The problem here is that as the economy grows demand for land increases. Businesses look to expand and require more space, people feel wealthier and decide they want bigger houses, and people are moving to where the work is, so there are more people who need housing.

With such high demand, naturally, land prices soar. It’s all about supply and demand. However, let’s remember that we can’t supply more land. Yes, in the UK there are constantly houses popping up everywhere, but economic hubs such as towns and cities just don’t have any more space to spare.

There will always be a need for land, so no matter what the economy threatens, house prices will always rise again.

Let’s take a look at the 18 Year Property Cycle in action:

It’s time to remember that this isn’t just a theory. Here are some real (and recent) examples of previous cycles:

You might notice that we’ve stacked these cycles on top of each other, and it’s for a good reason. Recovery phase prices always start higher than the last recovery prices. So although prices will fall during the crash, they’ll still be higher in the next recovery than they were in the previous cycle.

Can this knowledge of the property cycle be turned into profit?

Absolutely. The whole point of the 18-year property cycle is to be a guide into the future and allow you to make better investment decisions because you know what the economic future holds.

So, all you need to do to profit it from it, is to follow these simple dos and don’ts:

Don’t

  1. Panic sell during the recession. If prices are falling they are doing that, just falling. They’ll never be zero, because land is a finite resource. Don’t listen to the media doomsayers, the recovery period is just around the corner.
  2. Resist the boom! It’s easy to get carried away in all the hype during the property boom, but honestly, it’s the worst time to buy or remortgage. Fred Harrison described explosive phase and it’s accompanying mania as the “winner’s curse”. But why? If you’ve ‘won’ by placing the highest bid on a property during the boom, you’ve really lost. Prices will drop suddenly during the upcoming recession and will take until the next boom to truly recover.
  3. Pay too much attention to the media, except to try and work out where we are in the property cycle. It’s easy to be misled by harrowing headlines that shout doom from the rooftops. Remember, you know what’s coming!

Do:

  1. Prepare for the crash – you know it’s coming! Get all your eggs in a basket and make sure your portfolio is ready to weather the worst. The last thing you want to have to do is sell up during the crash.
  2. Use the crash as a chance to buy! Many people will be panic selling but only the smart investors will be buying. Now’s your chance. You don’t have to wait for prices to hit rock bottom.
  3. This might seem obvious, but we’ll say it anyway… sell during the boom! If you have any properties that just aren’t doing what you want them too, this is the time to sell them. As we said before, during the boom demand is through the roof and even the most lacklustre properties are achieving their asking prices. Hang on to your money when you get it, the next crash is on its way.

Conclusion:

So, know you’re up to date on how to use the 18-year property cycle to your gain – what are you going to do next?

Run out and buy the first property you see?

Hoard all your cash like a dragon?

No, you’ve just read our article, so now you know that you need to work out where we are in the cycle before making any financial decisions.

Hold on to your horses though – there’s plenty more to learn.

Check out some of our favourite resources on this topic:

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