The 18-year property cycle is the concept that property markets follow a relatively predictable pattern of boom and bust over an (average) 18-year period. This cycle can be broken down into four distinct phases: recovery, mid-cycle dip, explosive phase and recession.

Recovery. This phase follows a recession when property prices are relatively low, and there is little new construction. Gradually, as the economy improves, confidence returns, and the demand for property begins to rise. Property prices start to stabilise and then increase as buyers re-enter the market.

Mid-Cycle Dip. During this phase, economic growth is strong but waivers. Sentiment takes a knock, and leads to a short term dip or stagnation. As prices stop falling after potentially only falling very little, a strong confidence comes to the market, leading to the next phase.

Explosive Phase. As expansion continues the market begins to overheat. Overconfidence leads to excessive construction and speculative buying – sentiment is very positive, people want to enter rather than miss out and banks release more credit to mortgagees. While prices may still be rising initially the market becomes saturated. You may see announcements like “world’s tallest building being built” etc. Confidence is high.

Recession. This phase is triggered (in any of a number of ways) when the market realises there is fundamentally too much supply relative to demand – for some reason. Properties once DOUBLED in price over 3 years in the 70s – followed by a huge crash that was triggered by an Oil crisis. Property prices fall, construction slows down significantly and developers and investors face financial difficulties. This period of declining prices and reduced economic activity can lead to a broader economic recession. There is normally a particular trigger, and there are many potential indicators that a recessionary phase is beginning – none of them will give you any certainty unfortunately. It could be anything from stock market dips 6 months ahead, or drop offs in auction activity (normally the canaries in the mine of the property world) etc. The best indicator is (probably) the preceding high confidence and optimism.

Reasons for the Cycle

Economic Fundamentals. The property cycle is influenced by broad economic trends, including GDP growth, employment rates and consumer confidence.

Credit Availability. Access to finance is a crucial factor. Easy credit conditions during economic booms lead to increased borrowing and investment in real estate, contributing to the expansion phase. Tighter credit conditions during downturns restrict borrowing and investment, exacerbating recessions.

Buyer Behaviour. Market psychology and behaviour play a significant role. During boom periods, optimism and speculative behaviour drive prices up, potentially beyond sustainable levels. Conversely, during bust periods fear and pessimism lead to reduced investment and falling prices.

Supply and Demand Dynamics. The balance between supply and demand is central to the property cycle. Overbuilding during boom periods creates an oversupply, leading to subsequent downturns when the market corrects itself.

You should in our opinion always only ever buy a property that generates positive cashflow to protect yourself from this – rather than relying on capital growth too much, or solely. Many investors relied on Capital-heavy/only models in London in the lead-up to the 2008 crash – and suffered greatly as a result of having to sell at the worst possible time or hold negative equity/negatively cash-flowing property for a long time. Don’t be that person!

The real takeaways here though are that the 18 year cycle is not an exact science, cycle lengths change and property always increases in value over the long-term. So if you are holding for the long-term and are never forced to sell, then it matters much less if prices stagnate or dip over the short-term.

Time in the market is really so much better than time out of the market. Sitting on the fence can cost you dearly.

So where are we in the property cycle and how long is the one we’re in? Buy me a drink and I’ll tell you what I think 😎

Married2Property are a family-run property company that aims to create social good through property.

These articles are written by Darren de Wal based on his 12 years of experience as an active Property Investor, and 16 years getting to a senior leadership position as an Officer in the Royal Air Force. They are for the benefit of those with a general interest in Property, as well as those wishing to start out investing themselves.