Not many people will have heard of the 18-year real estate cycle, but some believe it can accurately predict the next house price crash.
Based on historical data going back centuries, it is theorized that there is a pattern of rising and falling real estate prices that repeats over and over – culminating in one major downturn 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 crash would be in 2026. But have today’s inflation and high mortgage rates thrown the cycle off track?
We spoke to him again to get his analysis of where house prices are headed now, and to ask if his prediction still holds.
Where has the boom gone? If the 18-year cycle went on schedule, it would mean house prices would skyrocket between 2020 and 2026 before crashing
What are the phases of the 18-year cycle?
The eighteen-year cycle begins after each crash, when the market takes about four years to bounce back.
Then six or seven years of modest growth begins in the so-called ‘recovery phase’.
Then there is a mid-cycle dip, often a one or two year downturn in the market, before a final boom phase follows.
The final boom usually lasts another six or seven years and this is where prices grow more on average 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 real estate prices would peak in 1989 and the recession that followed.
In 2005, he published Boom Bust: House Prices, Banking and the Depression of 2010, in which he successfully predicted the house price spike in 2007 and the depression that followed.
According to Harrison, he had predicted the crash of 2008 at least a decade earlier.
When we spoke to Harrison in June 2021, he predicted house prices would spike again in 2026 before we are hit by a recession that will overshadow the events of 2008.
Fred Harrison developed the concept of the 18-year real estate 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 at this point.
The cycle seemed to run perfectly until the end of last year. In the last economic boom, average house prices had risen by 27 per cent from £230,000 to £292,000 between April 2020 and November 2022, based on Land Registry figures.
If the cycle worked as it should, that same house price boom should continue.
Instead, average house prices are now falling following a rapid rate hike by the Bank of England and the new reality of higher mortgage rates that it brought.
Home prices have fallen 3.8 percent annually, according to Nationwide’s latest index, while Halifax says prices are down 2.4 percent year over year.
Despite the current downtrend, Harrison sees this as just a dip before prices skyrocket again.
“Covid was an interlude – pushing prices up prematurely,” explains Harrison. “They now have to level off to compensate.
The rising trend in real estate prices is the only way out
But the price trend will remain upwards, with some temporary adjustment to account for the exit from Covid and the fallout from Putin’s war on Ukraine.
‘The market is starting to get used to the tensions. But the upward trend in property prices is the only way out, reinforced by the Tory government’s anti-landlord policies and Westminster’s chaotic approach to the housing market.’
Contrary to popular belief, Harrison believes that if more and more landlords start selling, it will actually help drive house prices up.
“If more landlords sell, their sales this year will help rebound the real estate market, but they are not doing anything to balance supply and demand,” he says.
‘It would only limit the choice of prospective tenants; as a result, rents are rising, driving tenants into despair, some of whom decide to take out 35-year mortgages and squeeze their budgets, helping to drive prices up.”
House price growth is slowing: Although it varies from region to region, the latest ONS figures show average house prices increased by 1.7% in the 12 months to June 2023
Another major factor that will push prices up, according to Harrison, is next year’s general election.
“The Tories won’t upset potential homebuyers any more than they already have,” he adds. ‘Affordability of real estate remains a voting issue.’
He also argues that real estate will be seen as a safe haven against the backdrop of higher inflation.
“Land remains the best defense against inflation,” says Harrison. As inflation erodes returns on other assets, there would be increasing pressure to acquire rental-yielding assets, including residential land. This helps to strengthen the 18-year cycle.”
Will the housing market crash in 2026?
Harrison sticks to the 18-year cycle and hasn’t changed his mind about the next house price crash in 2026.
He says: ‘With elections in late 2024 and early 2025 in the UK and US, for example, governments will ramp up funding and policies to ensure that their trusted supporters continue to vote for them.
House prices will rise by at least 20% before 2026
And those subsidies will be converted into land value increases until 2026, when they peak.
‘Before 2026, house prices will rise by at least 20 percent. The sharp crash will then be the result of the ideological paralysis that will slow down the government’s response.
“In 2008, the only way to deal with the crisis was to load future generations with 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 latter stages of this decade. Instead, he expects the crash to result in a recession that will overshadow the events of 2008.
“We will be in unfamiliar waters,” he says. “No one can guess how fast house prices are collapsing.
“The market will freeze, with few transactions. The downturn will be prolonged and amplified by a variety of existential crises.
These existential crises will include a surge in immigration from sub-Saharan Africa in response to the climate crisis.
Then there’s the invasion of Taiwan, which President Xi has warned will happen in 2028.
And we can’t forget the Trump card. If the former president is re-elected in 2024, he will repeat his massive tax cut, which will send a massive upward spin on US housing prices and contribute to the fragmentation of the global economy.”
“In response to this deadly mix of events, some people will literally take to the hills to escape the coastal flooding.
“That drives up prices in those locations, but not enough to cushion the overall collapse of the housing market. How far will prices drop? It’s a mystery at the moment.’
What could break the circle?
If more expensive mortgages don’t break the cycle, what will? Harrison suggests something more dramatic is needed than Covid-19 or rate hikes.
He says, ‘Except for a world war, nothing can divert the economy from meeting the forces embedded.
‘Unhappy politicians can marginally correct the trends. An example is the tax-funded incentives for first-time buyers, which drove up prices and made houses even more unaffordable.
“But under the existing paradigm of property rights and tax policies, governments cannot stop the house price trend.”
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.