Opinion: Data, not dates, fuels property market
- Credit: Getty Images
Earlier this year, fund managers Schroders published an Insight report which, based upon almost two centuries of Bank of England data, threw a fascinating light on the UK’s house price history.
The firm found that the average house currently costs more than eight-times average earnings, a level breached only twice previously in the past 120 years, most recently immediately prior to the start of the financial crisis.
Schroders found that, relative to earnings, house prices were even more expensive in the latter half of the nineteenth century. Property values then plummeted, only bottoming out in the wake of the Great War. The Insight report maintained that this dramatic turnaround in the property market’s fortunes was attributable to three principal ‘drivers’: more houses, smaller houses and rising incomes.
More houses: The housing stock in England, Wales and Scotland more than doubled between 1851 and 1911, rising from 3.8 million to 8.9 million houses.
Smaller houses: Houses built before 1850 were significantly larger than those constructed in the second half of the nineteenth century.
Prior to 1850, average houses in England and Wales boasted a plot size of 913 square metres; those built between 1851-1899 averaged just 268 square metres. This change reflected both a shift in construction towards smaller types of property, particularly terraced housing and a marked reduction in the average size of houses across all property types.
Higher incomes: While average house prices fell by 23% between 1845 and 1911, due in part to the two factors above, earnings rose by 90% over the same period.
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The implication of a credible property-related ratio hovering at century-high levels is clear: it cannot last forever, though property owners taken aback by this statement should read on, for there is good news.
Back in 1998, a little-known economist, Fred Harrison, predicted the 2007-08 financial crash with uncanny accuracy.
Seven years’ later, he wrote a book, Boom Bust, in which he argued that the UK property market follows an eighteen-year cycle, supporting his assertion with almost two centuries’ worth of property market data. Claiming that the market adheres to a repetitive and historic sequence, Harrison’s argument was born out by the market crashes of 1953-54, 1971-72 and 1989-90.
Following a crash, the property market experiences four separate phases over the course of eighteen years.
The first phase lasts between three to four years, a period characterised by the withdrawal of lenders and investors from the market, resulting in a significant fall in property demand and an abundance of supply, the outcome of which is a slump in prices.
During the recovery phase, confidence gradually returns resulting in values edging up slowly, but steadily, for perhaps six or seven years.
Yet just as confidence appears to be restored to the market, a large cohort of buyers and investors become nervous and worry about the sustainability of property price increases. Harrison found that the market subsequently experiences a comparatively short period of up to two years when a small market correction occurs and prices tend to plateau.
Ironically, it’s at this point, when property appears to have lost its lustre, that Harrisons’ ‘boom phase’ begins, often triggered by some form of government stimulus, low interest rates, higher loan-to-value mortgage availability, dramatic reductions in property supply and an equally powerful surge in buyer demand. Sound familiar?
It’s impossible to say whether the cycle will continue, but there is an argument which says that when theories like this gain popularity, they can become self-fulfilling, particularly when a burgeoning number of property investors and commentators start discussing the theory.
Moreover, should a large enough group start basing their future property buying or selling intentions upon Harrison’s theory, there’s a strong probability of his predictions coming to fruition.
This begs the question: ‘Where are we in the eighteen-year cycle?’
Assuming Harrison’s theory remains accurate, the UK property market entered the boom phase around 2019-20. Clearly, this date marked the start of the significant increase in property values we have witnessed over the past 18 months.
Furthermore, should the eighteen-year property cycle continue to unfold as Harrison predicted, it would suggest that we have between three and four years’ of buoyant property growth before the cycle comes to an end and the process starts again some time after
THE WEEK IN NUMBERS
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Time to help loved ones onto the property ladder? Read Peter Sharkey’s blog exclusively at www.moneymapp.com/blog