The Property Hub

Episode 69: The 18 Year Property Cycle

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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.


 


Listen to the episode now: http://thepropertyhub.net/cycle


  • What do you reckon; do you buy into the 18 year property cycle?

  • If so, is it a model you'd use to guide your own investing behaviour?

Join in the discussion below!


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A really good podcast guys!

 

However, I think it is interesting to consider how earnings compare to house prices over a period of time. You can view this ratio via the link below:

 

http://data.london.gov.uk/datafiles/housing/ratio-house-price-earnings.xls

 

I think it is interesting to see that despite the recession, the ratio remains higher than in 03/04 for the North East, North West, Yorkshire And The Humber, East Midlands, West Midlands and the South West.

 

The ratio for East and the South East is higher than 2006 (not too far from the last peak), and London is just a runaway train with the ratio increasing almost year on year.

 

Does this all give some weight to the idea that the UK property market can be split into three geographical areas? Is London set for a correction? Is the SE also set for something of a slowdown or correction?

 

I think the extended period of an historic interest rate low is potentially scewing the entire picture. I think it will be really interesting to see what happens when interest rates begin to move and the election is done and dusted.

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Great podcast guys...and inspiration for a blog post from me too...so thanks!!

 

I think there is something in this...Robert Kiyosaki famously forecast the 2008 crash, as did Steve Keen from Oz and Nick Carlile from the UK speaks of a similar market cycle too...some smart people there to corroborate it...so I am resetting the calendar now then to: between now and 2023 buy, buy, buy, 2023 - 25 go on holiday, 2026 buy, buy, buy again :)

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Hi,

Great podcast as always. 

On the 18 year cycle. I think going on history at times like this is dangerous. 

With unprecedented debt and interest rates at levels never seen before it is going to be very difficult to predict the coming 10 years. 

London seems especially over priced.

 

Your view on Australia being near the top of the cycle, I would  question( I am living there but do not own property)

The affordability of property is perhaps a little worse than UK but compared to London they are virtually free :)

Surely affordability and wages are core fundamentals on property prices? 

Wages (which haven't gone up in UK) are a key factor in property. If they don't go up, then property shouldn't go up?

Surely they are linked (long term) and my wages don't double every 9 years. 

Supply and demand and low interest rates seem to be the current key driver, normalise these 2 and what will happen next?

 

Anyway it is interesting and your podcast does a great job discussing these issues.

My personal take is, as long as the location is good and the yield is above 6% then you cant go too far wrong. 

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Hello,

 

Just stumbled across your podcast. Very interesting. I would caution you predicting anything based upon an 18 year cycle. I am aware of Fred Harrison's work, and I agree with many of his ideas. BUT

 

The issue with using a cycle to predict what is going to happen now is problematic, as you may incorrectly predict whereabouts you are in the cycle. In this regard I think you have got it wrong. 

 

From what I am seeing, we are currently in the 'winners curse' section of the curve. Let me explain.

 

The 18 year cycle that you are referring to, and that Fred Harrison wrote about in his book 'Boom Bust - House prices, Banking and the Great Depression of 2010" assumes a certain amount of free market economics, and on banks behaving as they always have. This means responding with interest rate rises, rising indebtedness an the collapse of the unsustainable debt levels leads to a crash. 

 

Since the peak of the market in 2009, the powers that be have protected the weak institutions and the record levels of debt from clearing out the worst offenders in the marketplace - banks being bailed out, money printing (QE), and reducing interest rates to zero to increase liquidity in a collapsing market. Unfortunately, this 'hair of the dog' has not prolonged the hangover, and when it comes it will be greater and more painful as a result of this market meddling. 

 

So the sharp correction has been nothing of the sort, I believe that property hasn't crashed in the capital, and that the dip before the winners curse is a longer one than shown in the graph.  

 

I predict that in the next 6 months or so the market will turn. By February 2015, the market will be heading downwards. What will be the trigger point? Interest rate rises from the Bank of England. Mark Carney has pinned his timing on wishy washy metrics, and this suggests that he will need to administer the hard medicine, but doesn't want to kill the very ill patient. If he prolongs the delay then the situation will get worse and worse causing an even greater correction. When people extend themselves on 0.5% money, they are at the mercy of leverage. It's like investing in risky penny shares. Wouldn't we all rather be paying 6% interest mortgages? Houses would be cheaper to buy, our repayments would be the same as the are always based upon affordability, and we could move up the ladder more easily.

 

So why is there so much money in the UK property market? Interest rates are below inflation so it's a place to put your capital. A lot of foreign cash was invested in the UK, but this will be subject to capital gains tax as of next April, another reason that I expect the market to fall, as these foreign buyers become sellers.

 

Another factor to bring to the table is the baby boomers who are starting to retire, and die, meaning an increase in supply of properties.

 

When banks go bust this time around (and they will) the shareholders will be the first people to proper them up, not the taxpayers. They will not lend in a falling market, and neither will people buy.

 

UK property market, as you know, is leveraged speculation on a massive scale, using the bank 'loan' to invest in the market. Not much different to forex trading, or being an equity partner in a law firm; all is good when the market and profits are up. But when the market turns? People will cash in their chips and reduce their exposure. Greater supply of properties and lower demand means prices fall. 

 

I for one will be watching the situation with interest.

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Dear Rob and Rob,

 

I listened to this episode with interest. I am the author of 6th June moneyweek article covered by this podcast in which I drew on Fred Harrison's work, but also other authors, including Homer Hoyt, Roy Wenzlick, Fred Foldvary and others. Fred H tends to focus more on land whereas one needs to look at both land and credit.

 

My take on the 18 year cycle is slightly different to Fred's. I am of the view that this next cycle will be the biggest cycle in history. I do not think that Fred thinks that. Ultimately, all of the gains of economic progress - and they will be prodigous in this next cycle because we are in the upswing of another important cycle (the Kondratieff Wave) - is ultimately taken by the price of land. Therefore this cycle will be immense for property investors, investing in good locations.

 

I am pleased you devoted another session (epsiode 71) largely on the basis of my articulation of the 18 year cycle.

 

I run a small advisory business for investors and corporate directors to bring this research to investors who are otherwise caught between the confusing mess of opinion by so called experts in the media. I am therefore particularly grateful to MoneyWeek for allowing me to write a cover story and to you for bringing this to people's attention.

 

I have produced a full, blow by blow account of the 18 year cycle - this is available on my website - www.theascendantstrategy.com/reports/ as well as other articles and posts of interest. Please do visit it.

 

Best wishes,

 

Akhil Patel

Director,

Ascendant Strategy

www.theascendantstrategy.com

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To follow up on this episode, I was really excited to have Akhil Patel (who co-wrote the Moneyweek cover story that inspired this episode) as my guest on The Property Geek Podcast recently.

 

If, like me, you can't get the 18 year cycle out of your head, you'll want to hear Akhil's thoughts in more detail! Here's the link: http://www.propertygeek.net/18-year-property-cycle-akhil-patel/

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Still one of my favourite episodes, not because it's E69 but because of the economics/stats behind the theory.

With the S24 tax changes kicking in, snap elections, inflation creeping up, ongoing Brexit negotiations, worldwide events (e.g. Trump), perhaps this is confirmation of the 'blip' on the 18-year cycle? 

 

UK house prices in first quarterly fall since 2012

House price growth stagnates at four year low

 

The flip side, uncertainty = opportunities? 

 

And on a side note, the Aussie housing market is still chugging along after Rob B's prediction of a downturn (excluding houses near mining towns). However, with an oversupply of apartments in the main city centres (Brisbane, Melbourne, Sydney), not sure how long prices can keep going?! Median prices in Sydney hovering around $1m (~£570k)...won't be moving back anytime soon. 

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Being a bit of a stat-o, I really enjoyed this episode and it prompted me to look at the Scottish market in comparison. I don't know if anyone has done the same thing on here but there seem to be quite a few indicators that Scotland is 5 years behind London and 3 years behind the rest of England.

 

During the previous cycle:

London picked up in Q3 1996

The rest of England picked up from Q3 1996 to Q3 1998

Scotland seemed to pick up Q3 2001

 

In the current cycle:

London picked up Q4 2012

The rest of England had picked up by Q1 2014 (slightly quicker than the previous cycle)

Interestingly, Scotland doesn't appear to have picked up yet on this graph (coming up for 5 years since London's pick-up) but, from personal experience of recent valuations, I think it might be on the cards.

 

I have traded Forex in the past and carried out technical analysis of charts in a very similar way.

 

Does anyone have any similar insights?

 

ps The new Surface Pro is great for analysis of charts like these!

 

UK 18 Year Property Cycle.png

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Very interesting analysis Ross! Two questions:

 

1. Where did you source the data for the different regions?

2. Can you do a version adjusted for inflation (RPI would probably be best) so that we can see the real changes in value? I think that would make it easier to look back through time, as the effect of inflation will be adding to the compression of older data. Either that or you could use a log scale to get the proportional shifts over time, but that's probably getting too technical :D

 

Cheers
Paul

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On 5/8/2017 at 11:05 PM, DerekT said:

Still one of my favourite episodes, not because it's E69 but because of the economics/stats behind the theory.

With the S24 tax changes kicking in, snap elections, inflation creeping up, ongoing Brexit negotiations, worldwide events (e.g. Trump), perhaps this is confirmation of the 'blip' on the 18-year cycle? 

 

UK house prices in first quarterly fall since 2012

House price growth stagnates at four year low

 

The flip side, uncertainty = opportunities? 

 

And on a side note, the Aussie housing market is still chugging along after Rob B's prediction of a downturn (excluding houses near mining towns). However, with an oversupply of apartments in the main city centres (Brisbane, Melbourne, Sydney), not sure how long prices can keep going?! Median prices in Sydney hovering around $1m (~£570k)...won't be moving back anytime soon. 

 

Hi @DerekT,

 

Thanks for your post. 

 

Do you know when Rob mentioned the property downturn in Oz? 

 

Seems to be happening now. 

 

Cheers, J. 

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