Today, there are more reasons for optimism than pessimism in the U.K. housing market.
Despite the past few years to the rough start, there are still many opportunities every month for smart savvy investors to score double digit gains.
Yes, in this rising house market
And although I’m fairly optimistic about house prices myself, investors generally have a bad habit of being too optimistic when the market is high and too pessimistic when house prices are low.
But recently I’ve been getting asked where property prices are in the 18 year cycle.
This is the invisible market gauge that charts the cycle between booms and troughs.
I’ve met very few investors with any awareness of the property cycle, even among long term market watchers and property pundits.
But knowledge of the property cycle that turns in tandem can be used to predict the cycle’s swings and roundabouts…
Such as when will the market peak? Will house prices crash and is this new growth sustainable?
As John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” We haven’t reached the high euphoria just yet, but we’re well into optimism now…
Remember, the best time to prepare for a bear market is during a bull market, just as the best time to prepare for the next bull market is during a bear market.
But the herd mentality makes novice investors do the exact opposite. They shy away from buying when values flat-line yet nose dive back in when there is a competitive frenzy ballooning prices further up.
When conditions are good, investors believe it will never end. When everything’s going bad, they think it will never get better.
It’s so predictable yet so illogical. Investors will buy when all of the messages are positive, resulting in a seller’s market. Yet they won’t invest when the messages are negative, creating a buyer’s market.
It’s happening right now. I’m sure you’ve witnessed this in your local market?
Although we can safely say the days of 20% growth are behind us [for now] the next cycle has already begun.
You see the property markets goes around in cycles of around 15-20 years.
Where property prices rise for 10-15 years and then decline for around 5 years, before the cycle starts all over again.
This time around isn’t much different from past cycles.
Yes there is talk already how “pent up demand” will skyrocket house prices further than before and “how it will be different” this time around from the last time & the time before.
But like ingredients in a recipe, there are certain variables which always drive the property cycle.
Over the coming years, the residential market is set to improve, there’s no doubt about it; and in some locations and certain property types, quite substantially.
So what drives the boom-bust cycle?
A number of things:
- Market sentiment
- Confidence (“animal instinct”)
- The collective mindset [and mood] of the herds
- Scarcity
- The media noise
- Supply and demand
- Liquidity, economy, social issues and so forth.
The property cycle and its phases
Looking back over past property cycles and in particular the ‘boom times’, well located properties in certain regions doubled [on average] every 7-10 years, but this did not happen in a straight line…
Some years experienced double digit growth and there were other periods when the market was flat on its back or falling.
But just as day follows night, the property cycle goes through 4 main [yet] distinct phases in each 18-20 year period, as follows:
Stealth or Opportunity Phase:
The boom has led to bust, house prices have crashed and fear is prevalent among the masses.
Further price falls are expected, but this is the time the contrarian investors hover up and jump on the cheap bargains.
For the majority of amateur investors, they feel like the sky is about to fall, even when faced with great cheap cash flowing discounted assets and opportunities.
(Well I guess nothing sells newspapers like the doom and gloom right?)
Those investors who bought at the top, negatively geared or into shiny glossy off-plan brochures will fear the pressure and will be forced to sell to prevent ‘prices falling further’ and crystallise large losses.
So prices will start to fall again.
Repossessions and “fire sales” are never pleasant for owner-occupiers or troubled landlords but they create amazing opportunities for astute investors who are willing to get their cheque books out and often help borrower’s pre-repossession stage.
But during this time, prices will hit ‘rock bottom’ and become so affordable that vendors who don’t have to sell will often hang on to their properties creating a lack of supply.
This leads to buyers entering the market, competing for stock and more competition s l o w l e y pushes house prices up and new confidence sets in.
And this leads to…
The Awareness or Upturn phase:
The interesting aspect during this phase is there is price growth, but it doesn’t just happen at the blink of an eye.
(Although it may seem like it as the markets recover without too many people noticing, the media won’t rush in to report it).
As optimism settles in and fear subsides, vendors who were holding back during the slump phase take the plunge and put their property back on the market to entice buyers.
Owner occupiers and first time buyers usually take the lead like a Bull in a China shop because of lifestyle needs.
Novice investors cotton on to the fact prices are moving up and as word spreads, demand is on the increase and property prices start their exciting yet exhilarating journey up.
Government stimulus and low interest rates can often feature during this phase, with investment returns still looking attractive.
But as yields reduce, [many] professional investors usually hold back and are more selective about which strategy they adopt during this upturn phase.
Buy to sell or ‘wholesale flipping’ is generally on the increase, but many novice investors are keen to pay silly money at auctions or through estate agents, factoring capital growth [not instant profit] in their business plans.
Something I just observe like a Tiger hawking their prey…
The Ripple Effect
London and the areas around the City offering the ‘bluechip lifestyle’ are the first areas to increase or begin ‘booming’.
Next comes the middle ring and eventually price growth ripples out across most of the country.
At the end of this upturn phase, property prices have leapt forward and those who got in early enjoy healthy and substantially price growth…
And so we enter the peak of the market where prices reach great heights.
The Mania or ‘Boom’ Phase:
This phase becomes a feeding frenzy part of the cycle.
Greed and fear sets in. The greed to accumulate wealth & the fear of ‘missing out’ because ‘others are making money’.
The general hype around property and TV shows making it all look relatively easy means buyers will grab and pay anything, at almost any price to have a ‘piece of the action’.
Vendors get a whiff & can smell the desperation from potential buyers, so increase their asking prices, and tactics such as ‘ghost gazumping’ and open houses are much more common.
This leads to multiple buyers competing for reduced stock and houses sell for more than their asking prices, with little or no risk of down valuations.
This pushes prices further up. Yet blindly confident the market can sustain this level of growth and the market will accelerate even further, buyers should proceed with extreme caution during this period.
(Especially if prices start experiencing double-digit growth per annum)
Because at this stage, you know the property market is headed for trouble. (Yet many buyers will be blissfully unaware)
In the meantime, property developers will flood the market with new and off plan properties to meet the ‘overwhelming demand’.
The pendulum then swings to massive oversupply which causes the boom to end.
And while this is going on, the Bank of England will want to stop inflation getting out of control and slow down the price growth by raising interest rates.
When the bubble is pricked, it will probably be another great time to purchase cheap depressed housing stock.
Because as the old saying goes, “what goes up must come down”.
This then leads to…
The Blow Off/House Price Crash Phase
Because we have been spending far too much money on the high street, and this has had a knock on effect of the economy growing, property prices become unaffordable.
They then stall. And fall hard creating a property — house market — crash.
High street banks get nervous about lending. Finance becomes tough yet the man with the cash [or access to it] wins.
The cycle moves to the new Stealth Phase for the property cycle to re-start.
You see, this 18 year property cycle has been evident for well over 300 years, and most recently as follows:
- 1955 to 1973
- 1974 to 1992
- 1993 to 2008
- 2009 to 2024?
So Where are we now?
I would say we are currently in the “upturn phase”.
The market is looking very optimistic, with rising sales, more building activity, and a more equal market i.e. not a buyer’s or seller’s market [Rob likes to call this the “Wormhole” market].
With confidence making a comeback, property investors are showing greater responsiveness to lower interest rates.
Average gross yields are up to 5.5% with a number of attractive fixed rate mortgages, meaning investors are responding much quicker to these conditions than owner occupiers.
Surprisingly rents are also rising as accidental landlords are taking the upturn as a chance to sell existing stock pointing to a further recovery in the housing market.
Residential Returns Are Becoming Competitive
They are now seen as less risk and the speculative and novice investors have started buying again.
(especially as the general media have started reporting positive prices on the daily and nightly news)
Repossessions and assets which are ‘priced to sell’ are also reducing and homes are selling much faster as vendors are holding out for asking prices thereby discounting their prices by less.
But something also [interesting] happens as the residential market recovers – and the new demand for new property rises…
Parents help get their boomerang 25-year-olds in their own place which leads to increased offers being made and increasing contracts being exchanged.
A Final Word
Sir Winston Churchill wisely stated ‘The farther backward you look, the farther forward you see’ and never has this been more evident than when considering the history of UK property prices, the 18 year cycle and its prospects for the future.
But what about the cheap housing stock Mark?
Bargains can still be found in today’s market and certain regions of the country, especially the North – albeit admittedly more difficultly as we are already seeing early indicators the market is becoming less fearful and the new cycle of rising prices has kicked off….
And yes, mega profits can still be made by adjusting your strategy.
What matters?
In the meantime, focus on looking for opportunities most investors miss. The ‘not so obvious’ ones.
Many auctions which were often empty of serious bidders just a year ago are seeing increasing interest from investor-buyers with sold prices increasing across many UK regions for ordinary buy to lets.
This sharp turnaround provides real opportunity to those who understand their market and who are well placed to get in to other opportunities, such as commercial conversions before the crowd help shoot prices up.
For the astute investor, it’s not simply about vanilla single lets: It’s about recognising value in the market place where local economies are seeing increasing purchasing power and commercial to residential developments.
For Next time…
When prices ‘correct’ and the next downturn arrives, be ready.
When you see investors scared out of their wits, morose about the future, and taking their broker’s name in vain, buy. Ignore the gloom-and-doomers.
Here’s why…
At that time, if you can move against the crowd, you are that rare breed: a genuine contrarian – and your long-term success is virtually assured.
And then you’ll have another great buying opportunity.
What do you think?
I’d like to hear your thoughts on the 18 Year Property Cycle.
