The 18-year real estate property cycle is a useful method for predicting the future direction of house prices.
The cycle states that there will be a house price crash approximately every 18 years. The first house price crash started in 1953 to 1954, which was followed by two crashes in 1971 to 1972 and in 1989 to 1990.
It was first identified by an economist named Homer Hoyt and was later made famous by Fred Harrison
in his book ‘Boom Bust’. Fred Harrison’s book was first released in 2005 and successfully predicted the house price crash between 2007 to 2008.
As a real estate investor, the 18-year property cycle provides you with a better understanding of why prices go up and down with time. At RichLife we see real estate as a part of your overall retirement plan.
Markets Are Cyclical
Markets are cyclical, therefore whenever prices rise it’s worthwhile remembering that the market will always retrace.
Conversely, when house prices decline, it is inevitable that eventually, house prices will recover.
Knowing this, you can easily position yourself to sell at the high end of the market and buy when the market has hit ‘rock bottom’.
Why Is there A Property Cycle?
The 18-year property cycle occurs due to the entire investor market emotionally reacting to the rising or falling of real estate prices.
These reactions affect the total supply and demand of real estate in the market and thus, can lead to sudden price action. Because of this, the real estate market can be incredibly sensitive to property news and property investor sentiment.
The 18-year property cycle can be divided into 3 main phases:
Recovery Phase (Accumulation)
In the recovery phase, house prices are very cheap because the previous phase triggered a property recession. During this phase, there is an oversupply of cheap housing (a buyer’s market) and more and more properties are being put back onto the market.
Those that have started investing at the end of the recession phase will also start enjoying healthy and substantial price growth for their properties.
The recovery phase is an adequate time to accumulate real estate at a discount price.
As investors see and hear about the great returns made from the previous phase, a swarm of hopeful investors will enter into the property market.
Sellers will start to notice the sudden rush of willing buyers, which will cause them to take advantage by further raising the prices. This will create an overwhelming demand for new properties and an oversupply of houses.
Novice investors will be pushed further by their greed without knowing what will happen next and prices will reach their peak during this phase.
In the recession phase due to the oversupply of houses, the price will significantly decrease, spreading fear amongst common people and investors alike.
Without knowledge of the 18-year property cycle, novice investors who bought when house prices were high may start panicking and selling their property at a discounted price to mitigate further losses.
How Can We Benefit From The Property Cycle?
With a thorough understanding of the 18-year property cycle, you’ll be able to purchase and sell the property at the right time. Additionally, it can help you effectively plan for your long-term property investments.
Patterns Provide A Plan
The cyclical nature of the prices of real estate means that investors can plan out their actions in order to maximize their profits amidst every slight change.
Always remember that different phases of this cycle can trigger strong emotional responses, therefore it’s ideal for you to take a contrarian approach while controlling any impulsive emotions.
By sticking to a well-thought-out plan and using the 18-year property cycle you can flourish during the uncertainties of the property market.