When Are House Prices Going to Crash?

The Flying Frisby - money, markets and more

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House prices have to come down some time. But when exactly? That’s what we all want to know.

So here’s your answer.

The declines start in the US and Canada in 2025, followed by the UK, Europe and Australia in 2026.

That’s what the 18-year property cycle says, at least.

Today we explore that cycle and what it says about house prices.

18 Years of Boom and Bust

Economist Fred Harrison, who first covered the theory in his 1983 book, The Power in the Land, is very much the Godfather of the idea that real estate follows a predictable pattern over an 18-year period.

I first stumbled across Harrison in 2005, when so many were sure house prices had to come down (needless to say they didn’t), on reading his brilliantly prophetic article for MoneyWeek, arguing that we were two or three years from the top. Wasn’t he right.

Today, by most accounts, property should have already crashed. Real estate prices bear little resemblance to earnings. With the rise in interest rates that followed Covid, mortgage-holders found themselves with higher costs. Some were forced to sell, while prospective buyers could no longer afford to borrow as much as before. Increased taxes - I’m looking at you, Stamp Duty in the UK - have only added to the unaffordability.

And yet, while the market may be slow and stagnant in many parts of the country and indeed the world, it is not exactly crashing.

There was one school of thought that was steadfast in all the house-price bearishness which followed Covid, saying property’s time to crash had not yet come. They were the acolytes of the 18-year cycle in real estate. Yet again they’ve been proved right.

Real estate peaks in 2026, they said. After that we get four years of decline.

You know my views on cycles.

We have the seasons, days and nights, the moons, menstruation, the cycle of life - cycles are turning all around us. There are economic and investment cycles too: bull markets and bear markets, commodities super-cycles, Gordon Brown was always blathering on about the economic cycle, mining is cyclical. New technology goes through a clear cycle as it evolves and is adopted.

On the other hand, it’s easy to look back at the past, find some random pattern and declare it a cycle. Actually trading them in real time is a very different matter. In fact, the human need for narrative and the fact that cycles make for good copy mean it’s very easy to get wedded to the idea of a cycle, when a very different reality is staring you in the face. After 2008 many got it stuck in their heads that this was Kondratiev Winter and the next Great Depression, and, as a result, missed one of the most rip-roaring bull markets in history.

With all that said, the 18-year cycle in real estate has proved remarkably reliable, and, says Akhil Patel, author of The Secret Wealth Advantage, and one of Harrison’s great disciples, it goes all the way back to the turn of the 19th century. (I’ll show you that data in just a sec).

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Broadly speaking, there are four phases to the cycle - and it actually lasts about 18 and a half years.

* Years one to seven. A silent rally followed by …

* A mid-cycle slowdown or dip at around the seven year mark.

* The explosive phase. That’s when house prices really get on the map. Think 1983 to 1989 or 2002 to 2007. In the last couple of years you get a classic blow-off top - the winners’ curse.

* Finally, the correction which lasts around four years. Think 1989 to 1993 or 2008-2011. Then the cycle starts again.

I have drawn this chart for you here, so you can see it illustrated.