When it comes to buying and selling a home, you are likely to come across what’s known as “the property cycle” when doing your research, especially if you are looking for house price crash predictions…
The UK property market is cyclical in nature, meaning prices will fall and the market will correct itself over a period of time. In this informative guide, we take a look at what the property cycle is, how long it lasts, what causes house prices to crash, and whether or not that is necessarily a bad thing…
What is the property cycle?
A property cycle is a series of events that over time influence the property market, impacting things such as house prices, rental values, vacancy rates, time on the market, and buyer demand.
The property cycle has an impact on both the emotional and economical climate, meaning it changes the way the market performs and the behaviour of buyers. The first study of a property cycle was recorded in the book “100 Years of Real Estate Values in Chicago”, written by Homer Hoyt and published in 1933. The book identified a tangible pattern in property over the decade, and isolated three specific recurring phases:
Boom → → → Slump → → → Recovery
Property cycles can be driven by a number of factors, such as economic performance, supply and demand, and flow of capital. Essentially, studying the cycle will enable you to predict when is the right time to buy and when you should sell in order to make a profit more accurately, along with whether or not there is a UK house price crash coming.
As a natural part of this property cycle, demand will increase. This can also lead to an increase in supply, as developers look to build new or regenerate underdeveloped areas to cater to this demand – this is known as the boom. If there is more demand than there is supply, this means competition is hot amongst renters or buyers, and so this demand drives prices upwards. However, as prices inflate, they will eventually reach a point of unsustainability. As purchase prices and/or rent becomes too high, the properties become unaffordable, leaving people to either remain where they are or to look elsewhere (the slump). This can result in stock lying on the market for long periods of time with no buyer interest, at which point sellers will lower the prices in a bid to help the property sell. This is when the market corrects itself – prices crash or fall, meaning they are once again affordable. This enticers buyers and investors back onto the property ladder, helping the market into the recovery phase.
What is the 18 year property cycle?
Developed by economist Fred Harrison, the 18 year property cycle is a theory that claims each real estate cycle will consist of 14 years of either growth or stability in house prices, followed by four years of recession.
According to Harrison’s theory – and contrary to popular opinion – it is the housing market that drives the economy, not the economy that supports the housing market. More specifically, it is the price of land that makes the difference, as land is a finite resource. When the housing market enters the boom phases, developers look for unused or underutilised land on which to build. As people begin to invest, the boom continues until inevitable unaffordability and the slump. Harrison’s theory has been proven correct in the past, as he claims the evidence on which it is based dates back over 300 years. He even warned Gordon Brown about the 2008 house price crash twice – once in 2005, and once as far back as 1997!
What is a house price crash?
A house price crash is a collapse in property prices, and takes place as a natural part of the housing cycle.
Whether the house price index falls by more or less than 10 per cent determines if the market is experiencing a house price correction or a crash. A house price correction is a minor drop in the market, and occurs when the house price index falls no more than 10% from the highest price within the same year.
Property price corrections happen fairly frequently, and are necessary for balancing out the housing market supply and demand. A price crash happens less frequently, and can be a cause for concern for homeowners and investors alike. In fact, house prices in the UK have crashed just twice in the last 20 years, between 1990 and 1992, followed by another between 2007 and 2010. A crash is defined as being when the house price index falls by more than 10% from the highest value month in the same year. This can mean that for millions of homeowners, their house is worth less than their mortgage, which is sometimes known as negative equity.
In wake of headlines related to a correction, many people will consult sources such as an online house price crash forum in a bid to find out answers; however, it is worth noting that over the past few years, there has been evidence of the same contributing factors that have caused a fall in prices time and time again.
What causes house prices to crash?
There are a number of things that can lead to house prices collapsing, such as:
Increased interest rates
When interest rates are low, mortgages are generally speaking more affordable. When these rates go up, homeownership can be placed out of reach, meaning what was once affordable may not be anymore. It may be the case that those who were thinking of getting a mortgage no longer wish to do so, or that those who currently have a mortgage with a variable rate are now no longer able to keep up with the repayments. This can lead to defaulting on the mortgage and eventual foreclosure, which can add to the supply available on the market.
When there is high demand but limited supply, this competition for properties drives prices upwards. On the other hand, when there is too much available stock and not enough interest from buyers, sellers and developers lower prices in a bid to shift the empty properties.
When the economy is robust and performing well, there is job creation, wealth generation and development to support the demand for housing. Recession often results in job loss, which can see people sell their homes to downsize or use the capital to make ends meet during difficult times. Sellers are aware of the fact that many buyers simply won’t have the budget to afford market value, and so if they are keen to sell in a poor economic climate, they will likely have to do so for less.
Housing policies are often at the heart of manifestos, meaning an election or referendum will have an impact on the property market. As such, in the run up to either political event and in the aftermath, it is possible for both house prices to decline and transactions to slow while buyers wait for stability to return.
Are falling house prices good or bad?
When examining the state of the nationwide property market, is anyone to benefit from a house price crash?
This largely depends on whether you are looking to buy or sell during this period of depreciation. If you are a homeowner, seeing the value of your largest asset fall before your eyes can be difficult, especially if you had been hoping to sell. If sellers have no choice but to sell during a period of depreciation, this can mean making a loss on their property, which can have large scale financial repercussions.
However, slowing prices may not be bad news for everyone. For investors, a dip in the UK property cycle can present good opportunities to acquire new properties for less. These buyers often tend to be cash buyers as they have accumulated wealth through past investment deals, meaning they are in a strong position to buy quickly and below market value, and often in prime markets. First-time buyers can also benefit from a house price crash too. Depreciating prices can also be hugely positive as it means homes that would have been out of reach may now finally be affordable.
Many economists forecast a house price crash after Brexit, and since the UK voted to leave the EU, speculation has been rife about how this will impact the value of property prices.
Some data has shown that prices have slowed throughout the year, but a house price crash in 2017 is unlikely; while some may be worried, others are unphased by the news given the accelerated pace of growth in the years previously. Nationwide Building Society has reported that prices across the country dropped by 0.2 % in May compared to the previous month. Prior to May, there was a 0.2% drop in April and a 0.3% fall in March, though house prices are still 2.1% higher than they were at the same time last year.
The reasons behind the recent house price fall could be attributed to a number of factors, such as the snap election. Not only did the UK experience a General Election occurring unexpectedly amidst EU negotiations, but the result was largely unpredicted as well. Political and economic skepticism and/or uncertainty often reflects negatively on property prices, and so this is by no means anything new. Mainly, the drop in house prices is a result of the situation where house prices were continually rising at a much faster rate than earnings and this pattern was simply unsustainable in the long term. Inflation reached 2.9% in May, yet incomes only went up by 2.1%.
Essentially the price of properties outpaced the cost of living; in some parts of the UK, house prices have risen at 10% a year, and in some parts of London, homes are worth twice as much as they were in 2010. A correction will always be required to stabilise the market and some suggest this is what is happening right now. Reports of house buyers price crash predictions will always be the headlines when house prices begin to lose momentum.
Recent figures from the National Association of Estate Agents reveal that more than three quarters of homes are selling for under the asking price backed by research from Rightmove which shows that house prices fell too in June for the first time since 2009, the future of the housing market certainly looks ambiguous. Others however put a brighter spin on the situation believing these latest predictions to be pure sensationalism. After all demand for housing will always be higher than supply. Property markets outside of London have shown substantial accelerated growth as people are priced out of London into surrounding commuter belts.