The 18 year property cycle has been a hot topic of discussion among economists and investors for decades. It advocates that property prices follow a cyclical pattern, with periods of significant growth followed by periods of decline. The duration of each cycle is typically around 18 years.
The 18 year property cycle gained prominence after economist Fred Harrison accurately predicted the UK property market crashes of the late 1980s and early 2000s. Harrison's analysis suggested that these crashes were simply part of a recurring pattern of market cycles.
How does it Work?
Although the 18 year property cycle is not an exact timeline, it comprises two main phases.
After each crash happens, the property market takes about four years to restart its upward trajectory again. This is followed by six or seven years of modest growth in what is known as the recovery phase.
Next, there is a mid-cycle dip, often a one or two-year downturn in the market, before another phase of growth ensues, which typically lasts for another six or seven years. This is the more aggressive half of the cycle with prices rising faster and reaching fever pitch in the final two years - the final two years are known as the Winner's Curse.
Fred Harrison believes that we are about to enter the Winners Curse.
Grad Rags to Riches has 3 blog posts dedicated to the 18 year property cycle, so if this is a new concept to you, go and hunt these down, starting with this one.
While the 18 year property cycle should make property investment predictable, the cycle has actually generated more questions than anything else covered on this site: "Where are we in the cycle? Is the cycle still on track? Will this affect it? Will that affect it? Should we buy or sell!”
Arguments Against the 18 Year Property Cycle
In recent years, there has been increasing skepticism about the validity of the 18 year property cycle. Critics argue that the global financial crisis of 2008 fundamentally altered the dynamics of the property market, making it less predictable. Others point out that the theory is based on a limited amount of historical data and may not accurately reflect current economic conditions.
One of the main criticisms of the 18 year property cycle is that it is overly simplistic and fails to account for the diverse factors that can influence property prices. For example, economic growth, population demographics, technological advancements, climate change, geopolitical events, and government policies (more on this later) can all play a significant role in determining property values.
Furthermore, the 18 year property cycle theory assumes that the market will eventually return to a ‘normal’ state after a period of decline. However, detractors believe that the market may experience a permanent shift, particularly in the wake of major economic events, like a financial crisis, war, and pandemic.
House Prices in Real Terms
Looking over the last 16 years, critics say they cannot see the milestones that should be highlighted in the cycle. Property prices in real terms have done very little since 2012, and it is difficult to see a mid-cycle dip followed by aggressive price growth. Plus, we have had Covid in this timeline, a major war, and excessive inflation - all of which threw a major spanner into the works.
The Nationwide House Real Price Index adjusted for inflation shows that the current average price of a home today is exactly where it was in 2004.
Over the two years between 2020 – 2022, nominal house prices rose to an all-time high sparked by the Covid Pandemic due to factors such as people's sudden desire to have homes they could work from comfortably, or with gardens. Also, the 2021 stamp duty holiday inflated property prices as many sellers simply added extra to the asking price of their homes.
After the Covid mini bubble when property prices peaked in 2022, prices fell by 3% in nominal terms, but not when adjusted for inflation which spiked in 2022/2023. In real terms, accounting for inflation, property prices fell by 15% - that is a crash!
According to the 18 year property cycle, the next two years should move into the Winners Curse - such a boom that it then precipitates a crash. But, at the moment we are nowhere near a boom, and it's not like we have been on a strong rise over the last 5 years.
Interest rates are coming down and property prices are up 2% this year to August, but that is nowhere near the boom suggested by the winner's curse.
The Role of Government Policies
Critics of the 18 year property cycle argue that government policies have a significant impact on the property market, more than ever, and can influence the duration and intensity of property cycles. For example, interest rate changes, tax incentives, and regulations can all affect demand for housing and consequently property prices.
In recent years, governments have become increasingly involved in the property market, particularly in response to the financial crisis in 2008 with measures such as quantitative easing, mortgage guarantees, and rent controls implemented to stabilize the market and prevent a significant decline in property prices.
We again saw government dropping huge amounts of money into the economy in 2020 due to Covid, and this money was a large part of the inflation referenced earlier.
While these government interventions may have helped to mitigate the impact of the financial crisis and Covid, critics believe they may also have distorted the natural cyclical patterns of the property market. It is possible that the 18 year property cycle has been extended or even disrupted due to government intervention.
Arguments in Favour of the 18 Year Property Cycle
Proponents of the 18 year property cycle often point to the historical evidence supporting it. This historical consistency provides a strong foundation for the theory. Using the 18 year property cycle, Fred Harrison predicted the 2008 crash and he correctly predicted the crash before. But he didn't just say it a few months in advance; he said it years in advance!
According to Fred Harrison, the underlying force behind rising property prices is the finite supply of land. As the population and economy grow, demand for new housing increases, forcing prices up. Without the land supply to satisfy demand, property prices rise, causing banks to lend more against escalating asset values further reinforcing an upward spiral.
On top of this natural phenomenon is the speculative habit of exploiting the property market for additional capital gains. People begin to regard property as a safe haven for their money and a reliable investment vehicle, meaning prices are further propelled by the appeal of capital gains. This combination of greed and market speculation turbo-charge sentiment and sends prices spiralling before a bubble bursts.
What Fred Says
In his most recent interview this year, Fred Harrison said the 18 year property cycle is still working. Furthermore, he stated prices will rise about 20% before a major crash in 2026.
He believes Covid caused house prices to rise higher and faster than they would have otherwise done, and the past year or so of house price dips has merely been a recalibration. The housing market is now ready to continue its upward trajectory.
Harrison is adamant that mortgage rates will continue to fall encouraging investors, first-time buyers, and home movers to push forward with plans. He adds: “The Labour Government push for an increase in construction will persuade people that all is well in the property markets, so more people will take out the forever 40-year mortgages with a growing sense that prices are heading in the right direction. In a rising market, people will borrow at whatever interest rate”.
Harrison is almost certain that the downturn will come in late 2026 and the only potential obstacle that could upset his timeline is an escalation of current wars. He believes the next downturn could eclipse any house crash we have seen in the past.
Further Evidence Supporting the Cycle
In this week’s news: Nationwide, the UK's biggest building society, is to allow first-time buyers with a 5% deposit to borrow up to six times their income. This follows on from Halifax and Lloyds saying they would allow new buyers to take out loans worth up to 5.5 times their household annual income.
In July, new fixed-rate mortgage deals priced below 4% went back on sale for the first time since February.
Also in this week’s news: A further £1 Billion of pension funding has been committed to the build-to-rent sector. Pension fund Nest manages £43bn of assets on behalf of a third of the UK workforce.
Commenting on the announcement Nest’s chief investment officer, said: “We can see there’s a critical shortage of housing supply, coupled with increasing demand for high-quality rental homes. By building more properties, we can extend to our members a great investment opportunity while helping to meet this demand and bolster the rental market.”
This is the stuff property booms are made of!
In the Grad Rags to Riches post ‘The Rich Get Richer: Another Reason Why The UK House Market Has Not Crashed Yet’, it was shown that the wealth gap in the UK has increased due to government policies enacted during the pandemic and that this increased wealth gap is propping up the housing market.
As inflation gradually recedes and interest rates follow suit, we stand poised at the threshold of a new phase in the economic landscape. The Rich will move cash out of interest-earning accounts, buy more assets and increase mortgage lending, all of which will drive asset and house prices higher.
The blog post ‘Landlords: Another Reason Why The UK House Market Has Not Crashed Yet’ argues that the dominance of private landlords in the UK housing market is a significant factor contributing to the market's resilience and another reason for ever-increasing house prices, defined by the staggering rental yields that the unregulated rental market allows.
Landlords are entitled to ask for whatever rent they think they can get, and as a consequence, housing prices continue to go up despite a net gain in housing stock.
Conclusion
The debate over the 18-year property cycle is likely to continue for some time. While the historical evidence supporting the theory is compelling, the changing nature of the property market raises questions about its continued relevance.
Fred Harrison's 18-year property cycle theory has proven its predictive power, accurately anticipating past property crashes and recessions. With his latest forecast pointing towards a major house price crash in 2026, based on historical data and underlying economic forces, the question is simple: Which economic theory will you believe….?