Stages of the 18 Year Property Cycle

Stages of the 18 Year Property Cycle

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Last week we looked at the 18 year property cycle, its history, what causes it and how we can use it to make informed buying decisions.

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This week we are going to go into a bit more detail on each of the stages of the cycle. Looking at what characterizes each stage, what to look out for, plus typical behaviors seen from buyers and sellers. We will do this for each stage, as per below, and compare to the current cycle;

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1 Recovery phase.

2 Mid cycle dip.

3 Explosive phase.

4 Winners Curse.

5 Recession phase.

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Recovery Phase – key characteristics;

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-??????Years 1 – 7.

-??????Current cycle puts this at 2012-2019.

-??????Prices bottomed out from previous peak.

-??????Reluctance to lend/difficult to find finance at the start of the phase.

-??????Not heaps of mortgage options on the market.

-??????Cash rich buyers will enter market, get good deals on bottomed out properties.

-??????Properties still coming to market, people that don’t know about the 18 year cycle will continue to sell for fear of further losses.

-??????Deals to be had. Good time to buy.

-??????As phase progresses, confidence slowly returns.

-??????Prices start rising, growth occurs throughout. See below.

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Let’s look at the below from the ONS (office for national statistics) showing house price growth for the current cycle. Looking at the data, we can say that the recovery phase for the current cycle started in about 2012. That's four years after the crash (the 4 year recession phase), and it's led up to about end of 2019.

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What does the data say? Does it back this up? Average house prices started at 165,000 pounds at the start of the recovery phase, and they ended at 233,000 pounds over that seven year period which is the first of the growth phases.

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Over seven years, a total of 41% growth or 5% per annum.

?Mid Cycle Dip – 2019/early 2020;

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This happens at the end of the first seven year growth phase. Why does it happen? People are still cautious of what happened in the previous cycle, so when they see prices rising, they decide to take their profits and cash out of the market before another crash. Or, people that bought well in the recession phase decide that they are happy with their gains and they exit the market. Hence a more supply comes into the market, prices fall and a bit of confidence is lost – the mid cycle dip.

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Let's look at the current cycle and data from the ONS, it would appear that the mid cycle dip happened in or around September 2019 at a peak of GBP234,000 pounds for the average UK house price. The bottom of that dip/wobble came in early 2020 and wiped GBP30k off the average UK house price, the whole wobble ran for around 6 months.

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Again its worth saying here that this is just my interpretation of the data that is available to me, laid over my knowledge of the market and the 18 year cycle framework. Do your own research. The data is there for everyone…. go and analyse it yourself, do your own research as well and see if you agree with me. ?

?Explosive Phase – 2020 - ?

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After this wobble comes the second of the 7 year growth phases, the explosive phase, which is broken down into two sections;

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-??????The first five years.

-??????The last two years, known as the ‘winners curse’.

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How do we know if we are in this phase?

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-??????Prices are growing rapidly/growth is happening at a high rate.

-??????Lenders are willing to lend. New mortgage products available. Everyone wants a bit of the action.

-??????Lot’s of articles in the papers about growing prices - people start to jump on a bandwagon.

-??????According to Fred Harrison, people are incautious. They use their homes as a way to build wealth, fueled by greed (of massive gains) and fear (of missing out).

-??????Properties are sold at over asking price.

-??????Heaps of competition.

-??????Gazumping is common.

-??????Good times are rolling….

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Sounds familiar?

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What happened since the mid cycle dip at the start of 2020? Looking at growth from April 2020, to April 2021….

In 2020 prices were at GBP230k, 12 months later they are at GBP256k according to the ONS, and if you looked at their website at the time you would have seen that they were showing growth in average house prices over one year of 10.2%! That is the UK as an average with some areas reaching 14%.

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Which, to me, would suggest that 2020 was the year the explosive phase started.

?One of the characteristics of the explosive growth phase is more and more people jumping on the bandwagon. People talking about it. Articles in the press. If you sit down and look at the papers that write about property you will see stories all discussing the market and the current growth.

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Once example of a headline from the 2021;

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“House prices see huge rise after busiest first six months of the year ever.”

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Now that is a classic explosive phase headline - people read that and they think, ‘oh I've got to get involved in that’. The article goes onto say that according to Rightmove, we have seen;

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-??????The busiest first half year ever recorded by Rightmove.

-??????Average UK house prices of property coming to the market reached a new record high for the fourth consecutive month.

-??????A 6.7% increase in just six months (versus an average of around 5% per annum from 2012-2019).

-??????See article below to give you an idea.

Here is a paragraph from an article written 20th Feb 2022;

"The issue is the speed that they are selling. We have the alerts set up on Rightmove but we are still too slow."

Houses are selling as quickly as they are hitting the market. Estate agents say that houses are selling on the day they are listed, with desperate buyers offering well over asking price each time.

Molly from Peter Alan Newport said: "The speed is really important at the moment. Nine times out of 10, we will have an open house day for the property with 15 to 20 buyers. And it's the first people to call us who are in a position to buy who get those slots.

"We typically sell a property on the day of the open house. Previously, we would expect some offers below asking price and and some at asking price. But now, we are getting offers for asking price and sometimes ￡10-15k above asking.

"It is a good time to sell your home but not to be buying, or moving house. You need to sign up for the alerts on Rightmove and Zoopla, and also speak to your local estate agents about receiving their property emails."

Yes, there is an argument that says this growth has been induced by the pandemic side effects of a new focus on home, and people wanting to move to a bigger space, but it also tallies with the 18 year property cycle.

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Moving through the explosive phase into the final two years of that phase which are known as the Winners curse.

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See below a paragraph from Fred Harrisons book on the 18 year cycle, where he summarises the Winnerrs curse…

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“The trades in houses/property are almost exclusively driven by the motive to speculate in the prospect of reaping huge windfall gains, and the price of land takes off in almost vertical trend under the influence of what is known as the Winner's Curse. This is the period of frenetic trading which prices can no longer guide people towards rational decisions based on what something is worth. This is most evident in property markets. Investors become reckless to the point where the winning bids on property are made by people who make the greatest upwards errors in the assessment of what something's worth, not in its underlying value. The psychology is primitive, the property must be acquired. At any cost. So convinced is the purchaser that the windfall fortune is there for the taking that he will outbid all comers, whatever it takes, as prices escalate the gap between reality and fantasy widens to breaking point”.

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Gazumping is common place, the price is unbelievably high, unsustainably high. What happens? Confidence is then lost, people start selling, and we enter a recession.

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Recession Phase – 2026…?

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This lasts for a period of four years, or there abouts. We all know what goes on in a recession; lenders not willing to lend, buyers not wanting to buy, heaps of properties come onto the market as people fear for a full scale crash, people that are leveraged or took on too much debt at the wrong time may enter negative equity and may not be able to service their mortgage debt…. Leading to more properties coming onto the market which has further downward pressure on price! Although, there are great deals to be had for those in a position to buy.

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Let’s look at 2008-2012 to see if this holds water based on the last cycle…

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Looking at the data from 2008 at the bottom to 2012 where prices started to rise again. We can see just 10,000 pounds worth of growth took place in the average UK property price from 155,000 pounds to 165,000 pounds that's growth of 6.4% over four years or 1.6% per annum which is a far cry from the 10 to 14% we're seeing at the moment! See below.

?There you go! That's the recession phase. After the recession phase, we go back to the recovery phase, which is the first seven year period of the 18 year cycle.

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Please let me know if you have questions, a bit more analysis next week on our current stage in the cycle and what the future might look like.

If you enjoyed the article please let me know, if I know what people like, I can do more of it.

Thanks, Callum