It is claimed that the property cycle drives the global foreign exchange and British real estate markets. In other words, the property market adheres to a categorizable, recurring, historical sequence of events. The property cycle is not unique; it is related to the business, credit, and general notion of economic expansion and contraction.
Despite the fact that the property cycle has historically been a valuable tool for conceptualizing the market and giving a framework for comprehending the many phases of the property market, few individuals have been able to utilize it to anticipate property prices. The 18-Year property cycle is one of the few reliable hypotheses that purport to do this.
What Is This Cycle Exactly?
Fred Harrison gained notoriety for forecasting the 2007-2008 financial collapse in 1998. In his 2005 book titled “Boom and Bust,” he contended that the British real estate market followed an 18-year cycle. Harrison supported his theory by demonstrating the 18-Year cycle’s recurrence over 200 years of UK home price data. Harrison’s arguments are supported by the market collapses of 1953-1954, 1971-1972, and 1989-1990.
The idea indicates that there would be a recession after a housing market crisis lasting three to four years. Lenders and investors leave the market, and demand for real estate dries up, leaving the boom-era plan for an oversupply of housing to drive down the prices. Following this is the recovery phase, in which confidence gradually returns, and prices increase over the next 6-7 years.
After the period of recovery, a brief market correction occurs during which prices stop for air. This normally lasts between one and two years and begins when investors become concerned about the sustainability of expansion. Thereafter, the boom period begins. The demand is fuelled by government stimulus and cheap financing restrictions, but the supply cannot keep up. This leads to high housing prices and rental increases over the next five to six years. The ensuing peak and decline signify the beginning of the succeeding cycle.
Why Does The Cycle Happen
With the exception of land, the dynamics of supply and demand keep prices approximately in balance in almost every market, whether it’s for things like cars or labor like hairdressers.
If we all become vain and start getting our hair trimmed every day, it will be hard to make an appointment, and hairdressers will hike rates to benefit from those willing to spend more for a haircut. Soon, these increased rates will entice new hairdressers to enter the market, and as a result, everyone will have to cut their pricing to stay competitive.
You wouldn’t want your hair cut by someone who just joined the market because they saw how much money they could earn, but that’s beside the point: supply and demand work together to maintain stable pricing over time.
However, this cannot occur on the land market because the quantity of land available is fixed; it is impossible to create more ground when demand increases magically. Yes, planning constraints might be loosened, but this is so politically difficult that it seldom occurs. In any case, demand is often concentrated in well-established areas.
Consequently, when the economy is expanding, and there is a desire for additional houses, stores, and industries, this increased demand will cause prices to rise. Since there is no supply mechanism to bring prices back down, land prices are rising faster than salaries and the cost of products. This is connected to Ricardo’s Law of Rent and explains why rents account for a more significant proportion of the economy over time.
People quickly see what’s occurring and recognize that they’ll get the most return on their money by investing in real estate (as a proxy for land). In periods of heightened demand, individuals speculate by purchasing real estate with the expectation that prices will continue to rise.
As a result of rising property prices outpacing income growth, the majority of people will soon be unable to afford to own a home. When this occurs, the bust occurs: property values collapse, generating instability in the banking industry (which has been lending money secured against high-priced property). The banks withdraw loans, construction ceases, and firms close, all of which have apparent implications on the stock markets and employment levels.
Eventually, prices naturally fall to a more sustainable level, and everything returns to normal when the cycle begins again. Importantly, each process starts from a greater “bottom” than the preceding one; hence, the long-term trend is always upwards, despite volatility.
In a nutshell, this describes the property cycle. It would be more correct to refer to it as “the land cycle” since the cost of constructing a home on a piece of land is comparable in London and Leeds and will not increase (other than due to inflation) over the next century. However, home prices are more accessible than land prices, so we can “read” house prices to determine what’s occurring in the land market and what’s in store for the economy.
Where Are We Now?
If the 18-Year cycle is accurate, the UK real estate market started its boom period between 2019 and 2020. Interestingly, this correlates with the rapid increase in home prices over the last year. There are unmistakable signs of a boom period, including an 8.6% increase in home values over the previous year, government programs to stimulate the housing market, and more easily accessible financing in 95% of mortgages.
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