Prepare for a five-year property boom

They say that history often repeats itself and don’t ask me who they are because I don’t know. However, an American philosopher George Santayana once said that “those who cannot remember the past are condemned to repeat it”. So, it is only fair that we look at previous property market patterns and analyse them to see if a pattern emerges, and we can base our future assumption on that basis. 

A 200- year Cycle:

 Phil Anderson, Founder of Property Sharemarket Economics, examines a business cycle and the critical role that property plays in boom and bust. By observing how these cycles have played out in the past, we can predict how the future market might shape and make assumptions as accurately as possible.

 We analyse an economic cycle that has operated in the UK and the US for the past 200 years and more recently in other economies. 

Boom and bust never end:

Phil Anderson analyses looking at the history, we can see that at least the late 18th century, economies have moved in roughly 18–20-year pattern followed by a depressed activity. For example, in the UK, the Lawson boom of the late 1980s (Lawson the then chancellor) gave way to the recession and property crash of the early 1990s. Roughly 18 years prior, the UK property prices had peaked in 1970, before the start of the credit crunch in 1973. And then, approximately 18 years after the 1990’s bust; we saw the collapse of 2008

What cycle are we in?

We are currently emerging from a mid-cycle recession into the land boom. It might not feel like a mid-cycle recession in the housing market, but the pandemic has been a significant economic event for specific sectors like hospitality, retail and tourism. Some might argue that if not for the pandemic, these sectors would not have suffered as much. However, mid-life cycles have often coincided with significant events such as the 9/11 terrorist attacks in 2001. Akhil Patel in Moneyweek argues that in 2019 the global economy was slowing, and the yield curve had inverted, a sign that slowdown was imminent. Regardless of a pandemic, there would have been a mid-cycle recession in 2020 followed by a land boom. Why? 

The land is limited in supply, and everybody wants a piece of it: 

Technology often accelerates the cycle and, to a certain extent, the boom of the second cycle. This is often linked with improved transportation, communication or consumer spending. We already know that inflation has hit 2.5% this year, indicating higher consumer spending, and the Bank of England (BOE) expects this to rise to 3% and maybe even beyond, which is much higher than the BOEs target of 2%.

Then we have significant infrastructure spending on projects driven by governments such as HS2, 5G high-speed internet networks, decentralised finance, automated transportation, biotechnology and smart cities etc., which have been driving the demand. Underneath it, all is land, and land will always capitalise on progress. 

Such technological development produces massive advances in economic productivity, cuts the cost of doing business, gives rise to vast new industries and increases the demand for space in new locations. For instance, the fall in demand for retail outlets on the high street has coincided with the move to online shopping and demand for warehouses growing exponentially. Savills estimates that this is solely driven by online retailers like ASOS and Boohoo and estimates that they occupied 8 million square foot of space in 2015, which has now increased to an estimated 60 million square feet, an increase of 614% in five years.  

When the cycle turns

Does this mean that we can time the cycle perfectly? Of course not. I firmly believe that it is “not about timing the market but time in the market” with the property that will eventually lead to success. No one can ever time a boom or bust, but you can make sure you have facts in front and prepare for both as best as possible because both will eventually happen. 

Akhil Patel from moneyweek predicts that the mania phase will begin around 2024, with a likely crash in 2026. The final two years of a cycle is heady and a risky time for the investors. 

Since the 1800s, when a crash happens, the average fall of the US stock market has been 50% and, in some cases more, like Europe in 2008. Property prices fall by around 30% in real terms. It starts to become clear that the housing boom was based on assumptions of ever-increasing house prices. The euphoria of the boom is matched by the despair of the bust. The darkest point of the crash comes about two years after the peak, when the banking system starts to collapse and is in the process of being bailed out, many businesses have shut, and unemployment is raging.     

Now, this is the best time to buy. The stock market begins to price in the recovery and bottoms first, and there are real-estate bargains to be had in the best locations. The cash pile you build up in the boom, taking difficult decisions to stay out or not jump fully in, will now pay a dividend and return value to you many times over. As Warren Buffets famously said, “Be fearful when others are greedy and be greedy when others are fearful”.

And as of now and here in the cycle in 2021, be bullish without being silly.