Property investment strategy: how you can use the 18-year property cycle

Choosing the best investment is all about trying to predict the future. Could the theory of the “18-year property cycle” help investors make the right decision?

From experienced property investors to novice first-timers, the end goal of any investment is largely the same – achieving the best returns through healthy capital gains and strong rental yields. While knowing exactly what will happen down the line is probably impossible, the most important aspect of property investment is its longevity, and this should be the key focus for any property investment strategy.

How the property cycle works

The theory of the 18-year property cycle was described by economic consultant Fred Harrison in his book Boom Bust: House Prices, Banking and the Depression of 2010, which was published in 2005 and accurately predicted the crash of 2007-2008. By looking at historic property prices over the last couple of hundred years, Harrison recognised that the property market runs in a fairly predictable 18-year cycle.

According to his ideas, the cycle consists of a crash, a gentle recovery phase, then a natural correction in the market before a boom occurs over the next few years, followed by a crash as the whole process begins again.

The last property market downfall came about during the 2007-2008 credit crunch, and the market is expected to build up to its next peak in 2026, according to Harrison, meaning we are currently in the middle of a market correction which will be followed by around six or seven years of vast growth. This is supported by house price index figures released over the past few months showing a general stall in price rises (although regional variations often buck the trend, with the north currently outperforming London and the south-east).

The current climate

Of course, much depends on the political and socio-economic climate at the time, with various governments implementing a range of measures in an attempt to control the housing market over the years. Examples include the current Help To Buy scheme trying to get more people on the property ladder, as well as stamp duty changes making it easier for first-time buyers while adding a surcharge to try and curb second home-owners (and property investors).

The main driver behind most markets is of course supply and demand – an overabundance of stock will cause prices to fall and market activity to dip; then, as the cheap assets are snapped up, prices start to climb again as demand returns and the market becomes more competitive. When demand outstrips supply, prices are pushed ever higher, which constitutes the boom period.

Long-term investment strategy

Whether the boom will be followed by a drop around 2026, as per the theory’s prediction, remains to be seen, but the main takeaway is that those investors who are able to see their investments into the long-term will inevitably reap the best rewards.

Although some investors, particularly in previously fast markets like London, have been able to achieve big turnovers in a short space of time, this should not be the aim of property investment and doesn’t use the property cycle to its best advantage. Those who bought a property 20 or 30 years ago, for example, won’t have failed to see its value soar up to today, even taking into account any market crashes.

“Historically, property has always been one of the best investment vehicles,” says Matt Eastham from lettings and property management company Easthams & Co. “There will always be peaks and troughs. I think the people that do well are the people that look at it as a long-term investment. The people who jump in and want to invest for five years, hoping to make 25% capital growth and 9% yields are kidding themselves.

“No one can time the market…so you’ve really got to have a long-term investment strategy. If you buy in the right area and you buy the right thing, over the long term you can’t really go wrong.”

Is there a right time?

There are opportunities to be had at every point in the cycle, from the boom period to the crash, but the current point we are at in the cycle indicates that now is a good time to invest. Importantly, rents are seldom significantly affected in the same way by boom and bust patterns, as the demand remains relatively constant, so sensible buy-to-let investments will always reap rewards. Prices will always recover as the next cycle begins again.

Listen to more in the latest BuyAssociation podcast

This month’s podcast will be covering a range of topics on the UK property market. We will be joined by Matt Eastham from Easthams & Co – Property Management and Marcus Docker from Visionary Finance. Hosted by our very own Katie Walker, the podcast answers some of our clients’ top questions on the UK property market, buy-to-let investments and trends, Section 21, letting fee bans, Generation Rent and buying a property through a limited company.

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