Was the property cycle behind the financial crisis?

The financial crisis was not a so-called ‘black swan’ catastrophe, but was down to the correction phase of the property cycle. This is according to Akhil Patel, editor of Cycles, Trends and Forecasts at Southbank Investment Research, who says property is fundamental to economic activity.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

It’s not central banks and quantitative easing, Akhil Patel says, that are currently driving stocks higher, but the 18-year property cycle in action. 

The real estate cycle:

The property cycle has an average length of 18 years, and can be traced back to 1800 in the US and UK, Southbank’s research has found. It is divided into three phases: two expansions of around seven years, each separated by a recession or economic slowdown. These are followed by a more volatile four year stage (as seen in 2007-2011) that includes a peak ahead of a recession-driven crash and a recovery.

So, where are we now? If the current cycle started in 2012 - midnight on a clock - we are approaching the slowdown overlap between the two upward phases, just as the central banks begin navigating through quantitative tightening. According to the theory, the downturn should occur in 2019. Corrections when they come are on average around 30% in real terms with the median fall on the Dow Jones Industrial Average 48%.

The following strongest part of the cycle is forecast to peak in 2026. On average, since the war, the rise in property prices in the second phase of the cycle is 11.6%, compared with 5.6% in the first phase.

Interest rates may be at historic lows, and have been since the start of the current cycle in 2012, but Patel expects rising borrowing costs to cause only a slight interruption, if any. This is because it is in the interest of central bank policy makers to observe economic cycles and ease in rate hikes.

Talk of the unaffordability of house prices is seen by Patel as nothing new, and unlikely to disrupt the long-term house price cycle. It has only been interrupted by the two world wars in the last century.

Patel says other countries are now showing highs in their property cycle roughly synchronised with the peaks of the US cycle in the mid 1970s, early 1990s, and particularly in the Eurozone countries in 2008 and 2009. 

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