Not many people will have heard of the 18-year real estate cycle, but some believe that it can accurately predict the next home price decline.
Based on historical data going back centuries, the theory is that there is a continually repeating pattern of rising and falling property prices, culminating in a major drop every 18 years.
The cycle was identified by Fred Harrison, a British author and economic commentator, and using his own formula, he accurately predicted the two most recent housing market crashes in the early 1990s and in 2008.
When we spoke to Harrison in June 2021, he predicted the next dip would be in 2026. But have current inflation and high mortgage rates thrown the cycle off course?
We caught up with him again to get his analysis of where home prices are headed now and to ask if his prediction still holds up.
Where has the boom gone? If the 18-year cycle were running on schedule, it would mean house prices would boom between 2020 and 2026 before crashing.
What are the phases of the 18 year cycle?
The eighteen-year cycle begins after each dip, when it takes about four years for the market to restart its upward trajectory again.
Then six or seven years of modest growth begin in what is known as the ‘recovery phase’.
Then there is a mid-cycle bust, often a one or two year slump in the market, before a final boom phase occurs.
The final boom usually lasts another six or seven years and this is where prices, on average, grow more than at any other point in the cycle.
To arrive at his theory, Harrison analyzed hundreds of years of data from the US, UK, Australia and Japan.
In his book, The Power in the Land, published in 1983, Harrison correctly predicted that property prices would peak in 1989, as well as the recession that followed.
In 2005, he published Boom Bust: House Prices, Banking and the Depression of 2010, in which he successfully forecast the 2007 spike in house prices and the ensuing depression.
According to Harrison, he had already predicted the 2008 crash at least a decade earlier.
When we spoke with Harrison in June 2021, he predicted that house prices would peak again in 2026 before a recession hits us that will eclipse the events of 2008.
Fred Harrison developed the concept of the 18-year ownership cycle after mapping hundreds of years of data.
So where are we in the current cycle?
Anyone familiar with the 18-year cycle is probably scratching their heads right now.
The cycle seemed to be working perfectly until the end of last year. In the final boom phase, median house prices increased by 27%, from £230,000 to £292,000, between April 2020 and November 2022, according to Land Registry figures.
If the cycle worked as it should, the same house price boom should continue.
Instead, average house prices are now falling after a rapid increase in interest rates by the Bank of England and the new reality of higher mortgage rates this has brought.
According to the latest Nationwide index, annual home prices are down 3.8 percent, while Halifax says prices are down 2.4 percent year-over-year.
Despite the current downtrend, Harrison sees this as nothing more than a patch before prices move higher again.
“Covid was an interlude, which pushed prices up prematurely,” Harrison explains. Now they have to stabilize to compensate.
The upward trend in real estate prices is the only way forward
“But the price trend will continue to rise, with some temporary adjustments to take into account the exit from Covid and the consequences of Putin’s war against Ukraine.
‘The market is adjusting to the tensions. But, the upward trend in property prices is the only way forward, bolstered by the anti-landlord policies of the Tory Government and Westminster’s chaotic approach to the housing market.’
Contrary to popular belief, Harrison believes that if more and more homeowners start selling, it will actually help drive home prices up.
“If more homeowners sell, their sales will help restore dynamism to the housing market this year, but they won’t do anything to balance supply with demand,” he says.
‘It would simply restrict the choice of prospective tenants; driving up rents, making tenants desperate, some of whom will decide to take out 35-year mortgages and tighten their budgets, thus helping to raise prices.’
House price growth slows: Although it varies from region to region, the latest figures from the ONS show median house prices rose 1.7% in the 12 months to June 2023
Another key factor that will drive prices higher, in Harrison’s opinion, is next year’s general election.
“The Tories are not going to annoy potential home buyers any more than they already have,” he adds. “The affordability of property will continue to be an issue that will determine the vote.”
He also argues that amid higher inflation, the property will be seen as a safe haven.
‘Land remains the best of all inflation hedges, says Harrison. “As inflation erodes the returns on other assets, there will be an increasing push to acquire profitable assets, including residential land. This helps reinforce the 18-year cycle.’
Will the housing market crash in 2026?
Harrison is sticking to the 18-year cycle and hasn’t changed his mind about the next home price crash that will occur in 2026.
He says: ‘With elections in late 2024 and early 2025 in the UK and US, for example, governments will increase the flow of money and policies to ensure that their trusted supporters continue to vote for them.
House prices will increase at least 20% before 2026
‘And those subsidies will be converted into increases in land values until 2026, when they will peak.
“Housing prices will increase by at least 20 percent before 2026. The sharp drop will be the result of ideological paralysis that will inhibit government responses.
‘In 2008, the only way to deal with the crisis was to put future generations in debt and impose a decade-long depression through austerity measures.
“The quantitative easing option won’t be available to governments next time, and they don’t have a plan B.”
Harrison does not paint a rosy picture for the later stages of this decade. Instead, he expects the decline to result in a recession that will dwarf the events of 2008.
“We will be in uncharted waters,” he says. ‘It’s anyone’s guess as to the rate of house price collapse.
‘The market will freeze, with few transactions. The recession will be prolonged and reinforced by a variety of existential crises.
“These existential crises will include a sharp increase in immigration from sub-Saharan Africa in response to the climate crisis.
“Then there is the invasion of Taiwan, which President Xi has warned will happen in 2028.
And we must not forget the trump card. If the former president wins re-election in 2024, he will repeat his massive tax-cutting exercise, putting a huge swing up in US home prices and adding to the fragmentation of the global economy.”
“In response to this deadly mix of events, some people will literally head for the hills to escape coastal flooding.
‘That will drive up prices in those places, but not enough to cushion the general collapse of the housing market. How far will prices drop? Right now, it’s an unknown quantity.
What could break the cycle?
If the most expensive mortgages don’t break the cycle, what could? Harrison suggests that it will take something more dramatic than Covid-19 or interest rate hikes.
He says: ‘Short of a world war, nothing can distract the economy from meeting the embedded forces.
Unlucky politicians can marginally modify trends. One example is tax-funded incentives for first-time buyers, which have pushed up prices and made homes even more unaffordable.
“But under the existing paradigm of property rights and fiscal policies, governments cannot stop the trend in house prices.”
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