The 18-year property cycle is a lesser-known concept that some experts believe can accurately predict house price crashes. Based on historical data spanning centuries, this theory suggests that there is a recurring pattern of property price fluctuations, with a major downturn occurring every 18 years. Fred Harrison, a British author and economic commentator, identified this cycle and successfully predicted the housing market crashes in the early 1990s and 2008 using his own formula. In June 2021, Harrison forecasted that the next crash would take place in 2026, but is the cycle still on track amidst the current inflation and high mortgage rates? We spoke to Harrison once again to get his analysis of the current direction of house prices and whether his prediction remains unchanged.
The 18-year cycle operates in distinct phases. After each crash, there is a four-year period during which the market takes time to recover and start its upward trajectory again. This is followed by six or seven years of modest growth, known as the “recovery phase”. Next comes a mid-cycle dip, a brief downturn that typically lasts for one or two years, before the final boom phase occurs. The final boom usually lasts for another six or seven years and represents the period of the greatest price growth in the cycle.
To develop this theory, Harrison analyzed hundreds of years’ worth of data from multiple countries such as the US, UK, Australia, and Japan. In his book, “The Power in the Land,” published in 1983, he correctly predicted the peak in property prices in 1989 and the recession that followed. In 2005, his book “Boom Bust: House Prices, Banking and the Depression of 2010” successfully forecasted the peak in house prices that occurred in 2007, as well as the subsequent depression. Harrison claims to have predicted the 2008 crash at least ten years prior to its occurrence.
When we spoke to Harrison in June 2021, he anticipated that house prices would peak again in 2026, followed by a recession surpassing the events of 2008. However, recent developments such as inflation and the Bank of England’s interest rate hike have created uncertainties. Average house prices have started to decline, contradicting the expected boom phase of the cycle. Nevertheless, Harrison views this as a temporary setback before prices resume their upward trajectory. He attributes the current downward trend to the impact of Covid-19 and the aftermath of Putin’s actions in Ukraine. Despite these challenges, Harrison firmly believes that the long-term trend for property prices remains upwards due to the anti-landlord policies of the Tory Government and the chaotic approach to the housing market in Westminster.
Contrary to popular belief, Harrison argues that an increase in the number of landlords selling their properties will actually drive house prices higher. He explains that if more landlords exit the market, it would reduce the supply of rental properties, leading to higher rents and pushing tenants towards homeownership through longer mortgage terms. Consequently, this would contribute to increasing property prices.
Another factor that Harrison believes will contribute to higher house prices is the upcoming general election. He suggests that the Tories will prioritize property affordability, as it remains a significant issue for voters. Additionally, amid rising inflation, property is seen as a safe haven and a reliable hedge against inflation, further reinforcing the 18-year cycle.
Harrison maintains his prediction of a housing market crash in 2026, as he believes the cycle will persist. He expects house prices to increase by at least 20% before reaching the peak. However, he warns that the next crash will be more severe than the one in 2008 due to the lack of available options for governments to respond effectively, such as quantitative easing. Harrison foresees a prolonged downturn with minimal transactions and a variety of existential crises exacerbating the situation. These crises include increased migration from sub-Saharan Africa due to the climate crisis, the potential invasion of Taiwan, and the impact of the 2024 US presidential election, particularly if former President Trump is re-elected and implements tax cuts that inflate house prices.
Harrison admits that the extent of the price drop during the crash is uncertain at this point. He emphasizes that breaking the cycle would require a more significant event than Covid-19 or interest rate hikes, suggesting that only a world war could potentially disrupt the embedded forces driving the economy. While politicians may have a marginal influence on the trends, under existing property rights and tax policies, governments cannot halt the overall trend of rising house prices.
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