What is the 18 Year Property Cycle?

The UK property market has demonstrated strong investment potential for more than 50 years, and you will hear people band around the statement that property prices in the UK, on average, double every 9 to 10 years.  This, however, is a common myth, if you take a single 10yr period you will find this is not the case, and so any investment cannot be looked at purely for the potential for capital appreciation, due to the fact it is not guaranteed.  When discussing UK property prices, and talking about this doubling effect, the words 'on average' have to be added, because the property market in the UK is cyclical.  

What does ‘cyclical’ mean in relation to the UK property market?

This means that the market undergoes several prosperous years with affordable house prices, high demand, enthusiastic buyers, and a willingness from banks to loan money to purchasers. This leads to an increased trend in the market. Eventually, demand starts to surpass the supply of available properties, with the result that prices rising will slow the buying cycle down, as many people now cannot afford the higher prices.  As the demand decreases, prices now decrease as the lack of buyers force sellers to reduce their asking prices, reaching a recessionary phase. This is when property prices become affordable again, and the market becomes appealing once more, leading to the recovery phase.  This then resets the cycle, and it happens again, i.e. it is cyclical.

The economist Fred Harrison is commonly known for introducing the concept of the 18yr property cycle. His publications, such as ‘Boom Bust: House Prices’, ‘Banking and the Depression of 2010’, ‘The Power in the Land’, and ‘We Are Rent’, elaborate on his theories. Harrison suggests that the origins of the 18-year property cycle in the UK property market can be traced back approximately 300 years. This phenomenon is also observed in various other nations. He is recognized for his precise forecasts regarding the property market downturns of 1990 and 2008.

The basic concept of Fred Harrisons 18yr property cycle are the following 4 distinct stages:

1. Recovery – this is when the property market is recovering from a downturn and the property prices are slowly increasing. You can see evidence of this in cities with more development, new housing estates and an increase in the local population.  Look out for cranes on the horizon and busy building sites.

2. Expansion – occurs when the increasing property prices now rise faster due to increasing demand and limited supply. Confidence in the market returns, and the banks start to provide easier financial lending, with the media and news outlets backing this up with positive headlines, offering up reasons to move and spend.

3. Peak – the peak happens when the inevitable supply catches up with demand, saturation point, and the property prices reach their highest level achievable, and start to slow down, this is generally coupled with the government and banks increasing interest rates as the slowdown takes effect, to maximise their income.

4. Contraction – now happens when the demand decreases, forcing an oversupply, property prices now begin to fall, sometimes dramatically, only for the cycle to begin again.

Property investment in the UK has always been viewed as a great long-term strategy for investors, and any shorter-term dips seen in the market tend to get blown away by the broader trends.  

One inescapable fact is that demand has always massively outweighed supply. That is true in both the house-buyers market and the rental sector, and it is why values have tended to rise so significantly over time.  That doesn’t mean that investing in property is risk free, lets be clear, there is a risk with any form of investing, BUT there is a lot YOU can do to mitigate that risk when making any property purchase.

This article is taken from a chapter in our FREE downloadable guide "How to Build a Profitable Property Investment Portfolio" click the link to access this and any future FREE property investment guides.