18-Year Cycle
I spent the weekend reading every manner of different theory about what will happen in property this year. It was interesting to say the least.
One of the theories that caught my eye was the 18-year Property Cycle. It claims to apply to the last 232 years of history and works on the basis that there is a recession every 18 years exactly and that it lasts for four years leaving the other 14 years for growth. As with most property market theories, it's based on the idea that wages and property prices are linked and that when property prices get too high they inevitably come tumbling down.
A number of websites have been swearing by it and interestingly, an equal number have been disputing it.
To a large degree I agree that this theory has some value, but I feel that the problem with trying to tie down a theory that can predict the exact year and cycle is firstly that it doesn't take into account human nature and secondly it doesn't consider the way the original statistics were compiled.
Let's talk about human nature for a moment
The commonly held theory in human behaviour is that if you look at an individual, their actions are unpredictable but if you look at the group as a whole, their actions are predictable. The 18-year property cycle relies on humans acting predictably and not being able to change the course of their destiny. (i.e. We are destined to have a recession every 18 years, there is nothing we can do about it.)
Now you will notice that I mentioned that we are destined — that we cannot do anything about it.
In all cases for this theory to apply it needs to apply to a we. Not you or I, but we.
While I agree with the theory that we, by nature, go through feast & famine, boom & bust cycles — but to say it's, without fail, every 18 years is a bit silly, and a case of trying to fit the data with an attractive theory, which brings in my next point.
Be aware that statistics can tell almost any story…
There was a crash in the late 80s/early 90's and a severe one. I was in Australia at the time and just finishing school so I didn't have property of my own. But in Australia, just like the UK, we felt it very much the same. However – if you look at historical data during that period for house prices, the crash doesn't actually look that bad.
This is simply because the statistics are only compiled from actual sales information — not anecdotal evidence or theoretical valuations.
Here's an example of what I'm talking about…
One of my clients – Tony – bought his 4 bedroom house in 1988 for £65,000 and by the mid 90's if he had to sell that property it would have been worth £40,000 – a drop of around 40%. But the thing to remember is that he didn't sell until 2002, for nearly £215,000.
This means that the Land Registry statistics indicate that the house increased in value from £65,000 to £215,000 during the period, and (deceptively?) no fall was recorded.
But the thing to remember is: there was a crash, a crash so severe that next to nothing was selling at all! Only the truly desperate and the developers were in the market – a much much smaller proportion of the regular level — hardly a valuable data set at all in fact.
And with no valuable data set, there can be no reliable statistics, and with no reliable statistics then you could debate that no crash had happened at all. But just because something wasn't recorded, this doesn't mean it never happened.
Statistics are like that — moulded by the user to tell a story — which leads us back to the 18 year property cycle.
An 18 year cycle or a 7-10 year cycle?
The fact remains that there is a cycle. Whether it's 18 years, 14 years or 7-10 years is a matter of opinion and is largely not important. The cycle of boom and bust continues in any case and timelines that we attach to property or economic cycles are nothing more than theories.
The only real question that you need to consider is how do these theories affect your portfolio now and in the future? And what if you lose your job? Or your neighbours all lose their jobs? Israel drops a bomb on Gaza? Obama's a flop? The Chinese economy downturns? The Polish don't come back to fill the lowest paid jobs, the Lithuanians decide that the euro is better than the pound, or the Aussies quit all the pub jobs and go home? How will these affect you as a property investor?
My point is this
We study the past to help us understand our current circumstances and our future. We create theories, models, principles, laws and lists to make things easier and afford us a level of certainty going into the future. It's a natural process as human beings.
The worst mistake we can make is to follow the herd.
We all know that the worst way to make money is to listen to what everyone else is doing and follow it, yet this is exactly what most people do. They follow the herd. Property cycles are a great way to explain the herd. It's time to move beyond the herd…
Every successful investor has their own way of saying it. When everyone is selling, you should be buying – when others Zig, you Zag, etc.. It's all the exact same theory.
Right now everyone is jumping out of the market, except those of us that have seen this all before. We're jumping in. 2009 will be a big year for those that jump on board and shun the herd.
If you want to get involved but aren't sure how, I encourage you to call the team and ask them the hard questions. I train them to handle these and they stay up to date with where the market is going. Challenge them and I think you'll find a refreshing amount of certainty amongst all the doom and gloom you are getting from the media these days.
Simply call the office on +44 (0)207 923 6100.
Live with passion,
Brett Alegre-Wood
