Understanding the Property Cycle: is now the right time to buy?

“Is now a good time to buy a house?” It’s a question we’d all like to know the answer to. 

Unfortunately, there is no easy answer. At best, a savvy real estate agent can make an educated guess. The coronavirus has only added to the uncertainty

Like the stock market, the property market has ups and downs depending on spikes and dips in demand, political events, and other factors that impact prices. 

But like the overall stock market, which steadily climbs in value decade after decade, there is a steady increase to the value of property. 

The best we can do is try to buy when house prices dip low, and sell when prices are high. 

The 18 year property cycle

It’s hard to time the property market. But some swear by the 18 year property cycle to guide them.

The 18 year property cycle assumes that property prices is cyclical, but always rising. It works like this: 

Phase 1: Following a property market crash, there will be about 7 years of slow but steady recovery, during which property prices inch upwards. 

Phase 2: People start catching onto rising property prices and for about the next 7 years demand grows more drastically, and so does the price of property. Eventually, prices will increase faster than wages and become unaffordable. 

Phase 3: Because there will be more supply of expensive houses than demand, this causes a real estate bubble. Eventually, this will burst. The market will crash downwards for about 4 years to more affordable levels, and the cycle will begin again. 

Recovery -> Explosive demand -> Market crash. Repeat. 

Ideally, we want to buy in the crash/recovery phase and sell in the booming phase. But each time during this 18 year (on average) cycle, property in the recovery phase starts at a higher price point than the last cycle. Thus the ever-increasing value of property, and why, in theory, no matter when you buy property you should be able to eventually sell at a profit.

Take note: Location location location. There are regional differences in housing prices across the UK.  London and the Southeast are usually most costly and ahead of the curve of property dips and spikes, acting as signals for the rest of the country. 

Where are we in the property cycle?

The outlook for where we are in the property cycle is uncertain in the UK. As this FT article spells out, “the property cycle is going through a pivotal stage.” 

Some assume that coronoavirus has had an impact on housing prices, driving them down. This may be the case, but we are still learning about the impacts.

More telling is the Affordability index, which suggests that real estate prices are out of reach for too many, particularly in London and other in-demand cities. Other areas of the country are still seeing prices rise, slowly edging out of affordability ranges. 

This suggests the UK housing market is in phase two – rapid rise of prices. If and when the trend will turn is still in question. 

Is now the right time to buy?

There are a few high level uncertainties that anyone asking “when should I buy a house” and “when should I sell my house“ must consider:

Are we due a housing market crash any day? And will coronavirus lower housing prices? If you are convinced the answer is ‘yes’, then perhaps hold off. 

But it’s never a simple answer. And at the end of the day, whether or not this is a good time to buy a house is dependent on your personal circumstances and desire to get onto the property ladder.

Take the long view, if you can. If you plan to hold on to your property for a long time there is a good chance that its value will grow. And if your mortgage payment is close to or even less than rent, it could be a helpful saving and investment month over month. 

Other financial factors

If you are thinking of buying make sure you are financially ready and that you will not be overstretching yourself. 

Ensure you are prepared to make a sizable down payment, and comfortable with the monthly mortgage payments that will follow. 

To help you determine your readiness, download Money Dashboard, a free open banking app, to get a consolidated view of your finances and help you budget towards your housing goals. 

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