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What is the eighteen-year real estate cycle?

As a property investor, the eighteen-year real estate cycle just may be one of the most important concepts you can learn about. Newspapers always claim they know what’s going to happen to property prices next, but learning the facts about the real estate cycle will allow you to look for surefire signs of price changes yourself.

You’re doing yourself a disservice if you are resigned to believe that property prices are random. Learning to make sense of seemingly random changes in the real estate landscape will equip you to avoid making embarrassing mistakes, as well as set you up to make brilliant choices that will take your investment strategy to the next level.

So, what is the eighteen-year real estate cycle?

Luckily, you don’t need an economics degree to understand the basics of the eighteen-year real estate cycle. Let’s break it down.

It all boils down to the basic economic principle of supply and demand. Yet, it’s key to understand that land is different than other markets of products or services—that’s why you don’t hear about cycles like this in other markets! Land (or real estate) is different because there’s only a limited amount of land in existence.

Let’s compare real estate to, say, restaurants. When the economy is booming, people have more money to spend on eating out, leading to a greater demand for restaurants. Restaurant owners jack up their prices to profit off the hungry diners. This leads to the arrival of new restauranteurs looking to get in on the influx of demand. This evens out the playing field—greater supply to meet the greater demand.

It doesn’t work quite the same in the real estate market. You can’t just make more land. (Okay, you could probably find more land to turn into real estate, but it’s not that easy.) The same way the restaurant owners jacked up their prices, property owners will do the same. Except here, there are no new property owners to come in and balance out the supply with the demand with greater supply. Prices continue to go up, and more and more people rush to buy property to profit off these high prices.

It would great if prices could keep going up and up, everyone could get their slice of the cake, and we all got rich. But the reality is that the prices can’t keep raising. Eventually, there will be a “bust.” This happens when the prices get too high for people to afford. They stop buying, and property owners quickly lower the prices. The trouble with this is that banks have been lending money under the assumption of pricey property. Suddenly, they’re no longer able to lend. This, of course, has a negative – even devastating – effect on businesses and the stock market.

You can probably remember a recession in your lifetime—most likely the recession of 2008. Economist Fred Harrison identified the eighteen-year real estate cycle and broke it down into these phases:

How can the cycle help property investors invest better?

When the real estate market is approaching a bust (2006, for example), the media will push investors to buy, emphasizing the high prices and the chance to get rich. They won’t tell you to sell now before your property is worth nothing. Be careful what advice you take. Trust the telltale signs over the media.

So, how can studying the eighteen-year real estate cycle help us invest better? Well, despite that the cycle is imprecise and there’s no way to predict its every shift, simply knowing it exists gives you a leg up when investing. If you ignore the existence of the cycle, you might think falling prices mean they’re going to keep falling, and vice versa. If you know there’s a cycle, you’ll know things will eventually bounce back.

The trick is not to try to predict the cycle’s exact shifts. The “eighteen years” and the stages therein are an average which will vary in length every cycle. Instead, look for signs. If you’re seeing lower prices after years of construction and raising prices, you can guess it’s the “mid-cycle dip” phase, and you should get ready for the explosive phase. When that explosive phase comes, you’ll see most investors buying and buying. You’ll know a bust is coming soon, and you’ll sell the property you bought when prices were low earning a pretty penny.

If you do this, you’re already leaps and bounds ahead of many investors. Of course, the more you study the real estate cycle, the better you’ll be able to utilize it to invest successfully. But you don’t need to be an expert economist to avoid making mistakes that will damage your portfolio.

Wealth Hub Australia specializes in property investment, keeping a close eye on the markets, and more specifically on growth results and future development plans. This enables us to provide you with comprehensive advice, giving you a significant advantage within the property market. Get in touch with us today to achieve your financial and lifestyle potential!

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