How to profit from the 18-Year Property Cycle in 2023
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.
What is the 18-Year Property Cycle?
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 for 2023?
How is it playing out in 2023?
According to the model we should have experienced reasonable growth for 7 years from 2012. That’s about what happened. We can argue over dates by a few months, but in the 7 years from 2013 – 2020, we did see returns of around 42%, or around 5.1% per year.
There was something of a mid-cycle slowdown, in part thanks to Covid. So you could argue the first “7 years” were actually more like 6 years, with 1 year of mid-cycle slowdown.
From mid-2020 to late 2022 we then saw 22% growth or around 10% per year.
That is slightly better than the previous 2 years’ run-up in 2005 – 2007 (9% per year), but not quite as high as the 10.5% per year run-up in 1985-89.
In each instance, the last year of the ‘winners curse’ phase has been accompanied by rising interest rates in the UK. From 7.5% up to a peak of 15% in the 80’s. From 4.5% up to 5.75% in the noughties.
We’re now seeing a rise from a low base of 0.1% base rate, with a predicted peak of 4.75% by the end of 2023.
Raising interest rates has historically cooled the housing markets. With a higher base level of interest rates in the UK, the Government can then lower interest rates again a few years later in an attempt to stimulate economic growth.
That economic growth brings about a steady increase in the housing market before we all forget common sense. We then collectively start bidding things up to stupid levels because interest rates are now considered low.
What Causes The End Of The Winners Curse?
As mentioned, the spark that starts the crash varies but it’s often the increase in interest rates that signals the end of the Winners Curse phase. It can be anything that causes this rising of interest rates, usually referred to as Black Swan events. Think – currency devaluation, credit crunch, Brexit, new Government, Russian oil crisis, European War, etc.
2023 is going to be…
If we accept the idea that the Winners Curse has now come to an end, then according to the 18-year Property Cycle, we should be prepared for 4 years of crash and bottoming out in the housing market.
We certainly saw a ramping up of house price growth during 2020-2022, so that fits quite nicely with the cyclical peak. Add into that the fact we currently have high inflation, rising interest rates, a cost of living crisis, a European war, and a general global economic slowdown… the scene is set for the next 4-year crash phase.
So what can I do about it?
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, and if it does pan out as predicted, you’ll be glad you got out then. I’m not going to go into what else you could do with the cash at that point – sign up to my Masterclass to find that out!
Because if you remember what happened in 2008, putting it in the stock market wasn’t the best idea was it?!
Be Useful – What Can I Do To Take Advantage?
Over the next year (2023), we’ll probably see a dip in prices – or certainly nothing exciting that you’ll miss. But remember that the above are “average” house price movements. 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 or motivated sellers. Long-term buy & hold rentals that cashflow positively will be the investors preferred properties over the next crash phase, and even have the potential for some capital growth.
With interest rates higher than the last few years, and likely to go higher during 2023, finance potentially won’t be working for you as well in 2023. If you’re a cash buyer, or use low Loan To Value finance, you can take advantage of good deals from eager sellers when they come up.
Having said that, Central Bank rates are predicted to start coming back down again at the end of 2023, and that along with some money printing might be all that’s needed to kick-start the economy and the housing market all over again.
Now is the time to be cautious, but not pessimistic.
So you’re a believer then?
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.
I was lucky (definitely lucky, not smart) to have refinanced most of my properties at the start of 2022 for 5 years, so I’m sitting on a fairly low LTV portfolio of good cash-flowing assets. I probably won’t be looking to buy anything for most of 2023, but as we near the end of the year I will start looking to see what deals are coming available.
If you want to see exactly how I go about finding property deals, you can get your hands on my Property Module in the Masterclass course.
Nobody wants to sell during a slowdown in the market, so if properties are coming on at that time, chances are the sellers are open to negotiation.
Or you could just…
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, and negative equity, and who 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 60% 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 and 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 Masterclass 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.
If you want to book a call with me to talk about this in more detail, taking into account your personal investment strategies, you can do that here.