The following is a brief extract from some writing for the first chapter of my PhD (this section didn’t make it to the final cut but I do think that this is an important subject).
It deals with theories regarding the existence of and possible causes of a 17-18 year property cycle. If such a cycle does exist, then the next property crash is most likely to happen sometime in 2026
Evidence for a 17-18 year property cycle
“One of the questions arising from the 2008 crash is whether its’ specific characteristics were new. Was it unprecedented or linked to a cyclical pattern within the wider economy? Within the UK, there have been five major recessions in the last 50 years; three occurred at 17–18-year intervals (1974, 1991 and 2008) and either coincided with or were caused by crashes in the property market. The other two were due to the economic shock therapy of monetarism in the early 1980s (Coutts, et al 1981) and, from 2019, the Covid pandemic. Neither of these latter recessions were caused by internal dynamics of the economy but were instead due, on the one hand to political choice and, on the other, using a broad definition, to natural disaster. The other three seem to fit a hypothesis of a 17–18-year property cycle which is of such magnitude that it can collapse the wider economy.
Cheshire has extrapolated data on house prices and land values dating back to the nineteenth century as shown in the chart above. There are four main observations that can be made from the data he provides. Firstly, fluctuations in value from peak to trough were more extreme for land than house prices in all three of the last property-inspired recessions. Secondly, implicitly most of the profits from increases in house prices were captured by landowners rather than housebuilders. Thirdly, the crashes appear to have grown in magnitude. Finally, there is a prolonged period, from the 1920s to the early 70s, where the property cycle appears to have disappeared.
The data here only goes up 2007 and there is an issue in extending it to current prices as the Valuation Office Agency (VOA) ceased publicly measuring land values in 2011. Since the overall value of land is, though, included on the National Balance sheets we can use this dataset. As can be seen, the pattern seems to be repeating itself and may, if anything, be more extreme than in the previous cycle.
Potential causes
Harrison has won some recognition for predicting both the 1991 (Harrison, 1983) and 2009 (Harrison, 2007) crashes based on his analysis of a 17–18-year property cycle. As with Henry George before him, he has higher prominence outside than within academic circles. Nevertheless, based on his track record of predictions, he deserves consideration. Harrison’s analysis was originally based on work by Hoyt, who identified a cycle of similar duration by studying 100 years of land values in Chicago. (Hoyt, 1933). The cycle, as described by Harrison, is linked to affordability. His view is that house prices are connected to the length of time that it takes for the average homeowner to pay off their mortgage, assuming a typical interest rate of 5%. Having studied building cycles going back to the 18th century, he claims to have established a pattern that the “average price that people can afford tends to be the annual rent multiplied by 14 years”.
Harrison argues that the absence of the cycle from the 1920s through to the early 1970s was due to the disruption caused by the two world wars. An alternative explanation for the post-war absence of the cycle, is the vast social housing boom. UK Government figures show that from 1946-1970 over 6 million new homes were delivered with close to 52% of these being built by local authorities. By comparison, less than 20% of new homes in 2022 were built by either local authorities or housing associations. The overall total annual figure has also declined by about 30%, by comparison with the post-war average (Wilson & Barton, 2023). Public social housing supply is likely to have dampened demand for private housing, and therefore land. Conversely, the loss of social housing from the 1980s onwards is likely to have accelerated demand.
There are three questions regarding Harrison’s hypothesis that the driver of property cycles is affordability. Firstly, is the affordability limit set by the banks or by the individual? Following the 2008 crash, stricter mortgage lending rules were imposed by the Bank of England, so that individuals were able to borrow less in terms of multiples of their income. The issue of affordability is, therefore, linked to finance as well as wages. Secondly, there is an argument that lending for land purchases is not limited by restricting access to mortgages for owner-occupation, since the alternative for developers and financiers is to build for rent or invest in student accommodation. Many renters already pay more to their landlords in rent than their landlords pay on their mortgage, meaning that there is a market which can stretch affordability beyond that envisaged by bank lending for owner-occupation. Finally, is the driver for recessions originating in property speculation, Keynesian in nature? For example, as the proportion of income spent on housing increases it is likely to reduce other spending, thus potentially creating a classic crisis of underconsumption within the wider economy.
Taking the last issue first, increasing property values prior to the last property crash far from constraining spending, boosted it. During the last Labour Government, interest rates were mostly kept within a narrow range between 4-6%. Whilst Government borrowing was controlled, private banks issued mortgages on increasingly loose criteria. Property prices were on an upward trajectory, increasing considerably above interest rates. Owner-occupiers buoyed by their increased asset wealth remortgaged, releasing equity from their homes to fund consumer spending (Ryan Collins et al). In essence, the policy has been described as an unacknowledged “privatised Keynesianism” (Crouch, 2009) whereby Government debt to increase consumption was replaced by private debt, built on property and ultimately land values.
The key to whether property acts as either a catalyst or a brake on spending is based on both the availability of credit and its cost. Drehmann (2012), Borio (2012) and others have identified medium term financial cycles of 16-20 years that are interconnected to the property market and its underlying land values. They argue that these finance cycles are becoming both more severe and more global in nature. Borio also argues that temporary measures to alleviate the scale of a crash whilst failing to address root causes, have the effect of “kicking the can down the road”, meaning that the next crash is more severe. Given that the rescue of the economy last time was built on QE, mitigating the crash in house prices, this is an alarming prospect.
References
Borio, C., 2012. The financial cycle and macroeconomics: What have we learnt?, s.l.: BIS.
Chesire, P., 2009. Urban Containment, Housing Affordability and Price Stability -Irreconcilable Goals, s.l.: Social Economics Research Centre.
Coutts, T. T. W. a. F. W., 1981. The economic consequences of Mrs Thatcher. Cambridge Journal of Economics, pp. 81-93.
Crouch, C., 2009. Privatised Keynesianism: An unacknowledged policy regime. The British Journal of Politics and International Relations, p. 382–399.
Drehmann, C. B. a. K. T., 2012. Characterising the financial cycle: don’t lose sight of the medium term!, s.l.: Bank for International Settlements.
Harrison, F., 1983. The Power in the Land. s.l.:Shepheard-Walwyn.
Harrison, F., 2007. Boom Bust: House Prices, Banking and the Depression of 2010. s.l.:Shepheard-Walwyn.
Hoyt, H., 1933. One Hundred Years of Land Values in Chicago. s.l.:s.n.
ONS, 2023. National balance sheet estimates for the UK:1995-2021
Ryan-Collins, J., LLoyd, T. & Macafarlane, L., 2017. Rethinking the Economics of Land and Housing. s.l.:Zed.
Wilson, Wendy; Barton, Cassie, Tackling the under-supply of housing in England, https://researchbriefings.files.parliament.uk/documents/CBP-7671/CBP07671—Housing-supply—Historical-statistics-for-the-UK.xlsx
Roland Shanks Consulting 
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