How to figure out the house price cycle

It's that time again. House prices have only just started to register modest increases again, but predictions about the next crash are already starting to come in. 

One theory, elaborated by economist Fred Harrison in his book The Power in the Land, is that the economy follows an 18-year cycle and embedded within this is a 14-year property cycle. The book The Secret Wealth Advantage by Akhil Patel starts from a similar premise. Beginning with affordable house prices, the cycle passes through a mid-cycle ninth-year downturn before surging to a peak by the end of the 14 years. Then it all comes crashing down.

The underlying force behind these price rises is land, given we have a finite supply of it. As prices rise, speculation on land increases, thus holding back supply while demand continues unchecked. This leads to a peak which ends with money being sucked into paying rent and away from the productive economy, thus leading to the crash. 

Harrison is now arguing that the current UK house price trend will peak in 2026. He also argues that while house prices are still down compared with their 2022 peak, they have simply settled into their long-term trend after the distortion of the pandemic. In short, the pandemic did not disrupt the economic cycle.

Of course, predictions of a house price crash have been a common feature of the UK economic narrative for at least the past two decades. The 2008 economic slump saw average prices fall by around two-fifths, but they soon resumed their upward climb. Recent years have shown that even a combination of elevated property values with escalating mortgage costs is not automatically enough to upend the market. In the absence of forced sellers, the outcome is often a collapse in transactions rather than a collapse in prices.

Even so, nothing can go up forever, least of all house prices. Recently released ONS data highlighted that, as of last year, only the 10 per cent highest earning households in England could afford an average-priced home with fewer than five years of income. In London, average rents are between 40 per cent and 57 per cent of incomes. In short, the property sector is sucking up more and more money, leaving less to spend on other areas of the economy. If nothing else, this is likely to put a lid on house price growth rates.

For those who are unable to purchase a home, this scenario would be welcomed. By contrast, a fall in prices would be bad news for housebuilders who are already complaining that sluggish demand is driving down their completions. Given that they buy land on the basis of an expected exit price per house and that cost inflation has already increased a lot in recent years, it would result in a reduction in margins.