This might just be one of the all-time “must listen” episodes of The Property Podcast.
Why? Because we dived into a model which explains almost everything we’ve been talking about for the last 16 months – and which you can use to drive your own long-term investing decisions.
That model is the 18 year property cycle, developed by economist Fred Harrison based on evidence which he claims goes back over 300 years.
If you’re suspicious of any economists’ theories – especially ones that claim to predict the future using data from the past – you’re entirely right to be. But it might make you less cynical to learn that Harrison warned Gordon Brown about the 2008 crash as early as 1997 – and in 2005, when everything was still looking rosy, he reiterated his prediction.
What is the 18 year cycle?
Harrison states that a cycle is made up of 14 years of stability or growth in house prices, followed by 4 years of recession.
Why does this boom and bust happen? He says that while politicians believe that as long as the economy is strong the housing market will be fine, in fact it’s housing that drives everything else.
Or more accurately, the price of land. Because land is in finite supply in a mature economy, as the economy improves and it is in more demand from expanding businesses and households, the price goes up. Speculation kicks in as people invest for the potential of growth rather than rental income, and banks are keen to lend to fund mortgages and construction projects. Eventually, property is unaffordable for the majority – and then comes the bust.
Visualising the cycle
This diagram makes it easier to understand the components of the cycle:
- 7 years of relatively slow, steady growth
- A mid-cycle recession
- 7 years of rapid growth, including…
- The “winners curse” phase: the final two years when growth is at its fastest. Buying here would be a bad idea, because…
- A price crash and 4 years of recession follows straight afterwards
Why is this so exciting?
We’ve been aware of this cycle for a long time, but for some reason a recent Moneyweek article sent in by a listener (thank you to Matt Earle!) made us dig into it properly for the first time. Maybe the timing was just right, because so much of what the cycle would predict has in fact now happened.
Essentially, this is exciting because it allows us to make good predictions and adjust our behaviour accordingly. Knowing that property doubles on average every 9 years is a good motivation to get into property, but we can use the cycle to know exactly when to get in, when to ramp up, when to pull back…and maybe even when to get out and sit out the inevitable bust.
On the podcast, we get into a lot more detail – including:
- Put a note in your diary: we say when the cycle predicts that the next crash is coming!
- The sure signs that we’re in the “winners curse” phase
- Where in the cycle we are right now
- What we can predict about London (and why we have to treat it as a different market)
- How you can use the cycle to guide your long-term property thinking
It’s one of our most important episodes yet, so give it a listen!
Resource of the week
Let’s all play the house price game!
For once, Rob D came out on top on this one – scoring 7/9 compared to Rob B’s 6/9.
It’s a lot tougher than you might think, so have a go and let us know how you scored!
News this week
The average first-time buyer in London is paying 9 times his or her earnings to get on the ladder…which means that singletons are being priced out completely.
It’s not big news that the London market is crazy – but does it mean that “how much of a deposit do you have saved up?” is now an acceptable first date question?
This week’s mentions
Rob D has just recorded a course on flipping properties with our guest expert Susannah Cole, so keep an eye out for that soon!
We also mentioned that a few listener-led meetups are happening in the next month or so, so if you’re not already hanging out in The Property Hub forums regularly, get over there and see if anything is happening near you.
And finally, get your diary on standby, because we’ll be announcing the date of the next official Property Hub London meetup on next week’s podcast!
Join the conversation!
So, we made some bold claims about the 18 year cycle in this episode, but do you join us by buying into it or do you have more reservations?
Is this a model that you would use to guide your own investing behaviour? And are you going to re-think anything in your own plans after listening?
We’d love to know, so join the discussion in The Property Hub!
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