The 18 Year Property Cycle has received a lot of press since 2009 for apparently being able to predict house price movements. But is it a scam or is it actually real? Can we really know where we are in the property cycle and if so, how can we benefit from it?
If you already own property then this is going to be useful to know whether or not you should pay attention to the 18 Year Property Cycle. If you’re considering investing, then it’s going to be useful to know if this Cycle is real or not, and if it is how you can benefit from it.
I’ve been involved in property for a complete “cycle” now according to the timeframes, but honestly – I don’t have the hands-on experience of investors with 50+ years in the industry. Fortunately I am mates with quite a lot of them, and I’m pretty boring, so I talk shop quite a lot with them.
The 18 Year Property Cycle came about after a land economist called Homer Hoyt recognised it, and ever since it’s been brought out (usually retrospectively) to prove a point. The basic premise is that land values (and therefore property prices) go through an 18 year cycle. There are 14 years of growth (with a bit of a wiggle in the middle) followed by 4 years of decline / stagnation.
This kind of fits in with the last cycle
Growth in house prices in 1993 – 2000
Bit of a wobble, then rapid growth in 2001-2007
Followed by a mass panic, which lead to a decline and slowdown in 2008 – 2012.
But what about updating this post to 2020?
So according to the model we should have experienced reasonable growth for 7 years from 2012. Which feels about right. Then we can expect a mid-cycle blip in 2019/20 – which given the Brexit timings and the eventual rise in interest rates that’s got to come at some point – is a fair assumption.
Then everything will go bat shit crazy up until 2025/6 when it’ll all go to hell in a hand cart.
The spark that starts the crash varies but is often caused by an increase in interest rates. But it can be anything to be fair. Usually referred to as Black Swan events. Think – interest rate rises, currency devaluation, credit crunch, Brexit, new Government, etc.
2012 - 2019 as we can see in the below graph are kind of playing out as expected. That's 7 years of steady growth. Nothing over exciting, but it's going basically in the right direction.
So does this mean 2020 is the year we have a drop in house prices? There's nothing really on the horizon to suggest that is on the cards. We've got a fairly strong Conservative majority in power, Brexit has finally been agreed - but negotiations are on going at the time of writing this, interest rates are still historically low and even talk of lowering them again before the end of the year.
At the moment there's nothing that looks like it'll cause a blip. Stagnation I could see, but we've kind of had that in 2019 already. A lot of people were sat on the side lines waiting to see what happened with Brexit. With it now done and out of the way (ish), there's the potential that international investors will return to the UK market, and people in the UK will go back to doing what we love most... talking about house prices!
Very little is the honest answer. Property isn’t the easiest thing to jump in and out of, so it’s a little bit like being in a car with no steering wheel and watching a wall get closer and closer. You might know what’s about to happen, but you’re pretty powerless to stop it.
You can of course liquidate over a period of years, probably starting in 2024/5. You might miss out on some of the final frantic growth phase, but if it does pan out as predicted, you’ll be glad you got out then. I’m not going to get into what you do with the cash at that point though - read the rest of my blogs if you want to know, or sign up to my Mastermind!.
If you remember what happened in 2008, putting it in the stock market wasn’t the best idea was it?!
Over the next year or so (2020/21), there could well be a dip - or certainly nothing exciting that you'll miss. But remember that the above are "average" house price movements. London has taken a bit more of a beating while the Northern regions have seen some growth still. So while the UK follows general trends, there are always going to be regional variations.
The next year or two could prove to be a good time to be looking to pick up properties from scared investors. Long term buy & hold rentals that cashflow positively and due to the next 7 years, have potential for capital growth.
Following on from this stage, there's the potential for an explosion in growth. I’d start focusing more on short term deals. This could be either developments and flips, or just leveraging yourself to the hilt and buying anything and everything you can. The last 7 year stage is generally a time for free and easy credit from banks – remember self-cert 120% mortgages? Megalol.
Now is the higher risk stage. You’re looking at getting in and out of properties within a year or two. You don’t want to be left holding much property come 2025/6. So you’ve got 5 years to rinse the system.
Come 2025/26 I’d be reducing my indebtedness to 50% or lower across the portfolio, and only keeping properties that cashflow really well and are in high tenant demand areas. No more speculating on that regenerated mining town in Wales. Think major towns and cities, with properties in good locations, appealing to renters.
Honestly, I don’t know. I think it’s a bit too neat to say every 18 years this will happen, but equally humans are pretty forgetful and dumb. 18 years is realistically the time it takes for the last set of bosses to retire and be replaced by a new set of people who didn’t live through the last boom and bust – so they don’t have the benefit of hindsight. So it’s not surprising they get greedy and repeat the mistakes of the past.
Will I change my strategy because of it? Nope.
Will I amend my strategy? Maybe
The market drop off hasn't really occurred across the UK in 2019, and I can't see it happening in 2020 either. I do think we're in for a bit of a "nothing" period though, so it's kind of following the plan.
If prices in 2020, 2021, 2022 start going a bit mental, then I might take a punt and start buying more speculatively. But with a view to selling these speculative purchases by 2025/6.
I think the only impact the property cycle can have on an investor is when it comes to debt and leverage. The people who came unstuck in the 2008 crash were those with huge mortgages, negative equity, and didn’t have the ability to service that debt long term by owning properties with high tenant demand.
If you own the properties outright or with a small mortgage (say under 50% LTV), then it is much easier to weather the storm and ride out the crisis.
Sure it would be nice to be able to buy low, sell high every single time. But that’s not really investing, that’s trading. If you want to do that, then there are easier ways to do that. Trade the housebuilders on the stock market if you want an easier trade!
When it comes to property I have a long investment horizon of 2 property cycles at least, so as long as I can afford the debt I have – and that will be directly linked with how appealing the property is to renters – then I don’t really care if my house is worth £40k one year, £80k the next year, then £40k again the next.
So there you have it. I am indifferent about the Property Cycle and am not sure it’s really a thing. But I’m not so dismissive that I’ll ignore it. The joy of property in the UK is it’s so easy to track all the data, so we can watch how it is doing in relation to the 18 Year Property Cycle and make the call if we think it’s doing what they predict – then act accordingly.
I cover a whole section within the Mastermind on Direct Property ownership as well as Indirect Property ownership - so if you don't want to become a landlord with all the hassle that goes with that, you can find out more about how to do that. Or if you want to know exactly how I find the perfect property for my investment criteria, I walk you through every step of the way.
Plus a whole bunch of other stuff about all the other asset classes of course.
Hugs and cuddles
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