Political intrigue, gloomy economic forecasts, has there ever been a time in history when the future seemed so uncertain? Or you could put it another way, when has there been a time when economic futures are certain?
Economic uncertainty is always there and economic cycles followed regular patterns throughout history. The same thing applies to property markets. Regular cycles are clearly evident.
Bu what happens when an economic shock like Brexit and a property market cycle collide?
If we look at house price history in the UK from 1952 until the present day, you could chart the economic fortunes of the country just by looking at house price data from the period. House prices are one excellent barometer of underlying health.
Before the 1970s Property Market Cycles Ruled
Take a look at the chart below:
Source: Nationwide UK Historical House Price Data
Notice that prior to the early 1970s, things went along at a very leisurely pace. Nothing much happened other than a few ripples here and there.
Then along came the 1970s and things began to get a lot more interesting.
1973 Britain Joins the EEC
The 70s was the start of much more pronounced boom and bust cycles in both the economy and house prices. In 1973, the year Britain along with the Republic of Ireland entered the EEC a community of nations later absorbed into the EU, house prices increased by more than 45% in 12 months.
This level of house price growth still marks a record in house price inflation and the kind of peak we haven’t witnessed nationally since back in 2003. Yet a lot of people were opposed to the country joining what was a small club of European nations at the time.
It is uncanny how these great housing market peaks soon began to see periods of high growth then busts before the opposite occurred, hence the term boom and bust, which characterised much of the 80s, 90s and 2000s.
One thing that isn’t a coincidence is that great busts in housing markets have always coincided with the big recessions of recent years.
The 1973 Oil Crisis And Double Dip Inflation
The 1973 oil crisis and a double dip recession caused a house price crash between 1973 and 1975. This quickly removed all the feel good factor that came with joining the EEC. This was followed by a swift recovery and house price growth that exceeded 30%. High inflation and government spending cuts soon followed leading to another pronounced slump between 1981 and 1982.
Fast forward to 1990 and we saw the second biggest housing slump in recent history as interested rates sky rocketed and unemployment reached new heights. Another deep recession was underway.
1990s ‘The Birth of Buy To Let’
What followed was a period of relative prosperity, house prices recovered and went on to reach new heights thanks, in part, to the growing popularity of buy to let investment which really took off in the mid-1990s and the availability of affordable mortgages which were often in excess of 110% of the value of the property.
This led to the unsustainable levels of debt that eventually triggered the biggest financial crisis in history. Another great recession and a house price slump soon followed.
In between all this we have the housing market cycle which continues to operate in the background almost as regular as clockwork.
This typically runs over a period of four years. If you’re an investor investing at the start of a cycle, then you may see four years of capital growth before a peak is reached and correction arrives.
Beyond this regular cycle you may see periods of super high growth such as those witnessed in 1978, 1988, 1997 and 2002. Sell at these peaks and capital growth can be 50%, 100% or more depending on when you bought your property.
These happen on average every eight to ten years and coincide with the commencement of a period of economic prosperity. The most recent boom in the early 2000s was aided by an extended period of low interest rates, low inflation, improved spending power and gung-ho banks happy to give almost anyone a mortgage.
If we look at the amount of time that has elapsed since then, the next period of super high growth is already long overdue interrupted by the financial crisis and now possibly by the recent Brexit. At least this is what some analysts would have you believe.
Yet at the time of writing, the economic impact of Brexit remains unclear. The FTSE has actually exceeded its pre-Brexit vote levels.
As history shows us, the key to healthy property markets is a healthy economy. Recessions always trigger house market slumps but the opposite may be the case following Brexit. A weaker pound may just help the UK’s service industries and aid manufacturers who rely on exports.
The service industries have been responsible for all the positive GDP growth in the most recent quarter and any help from other sectors could make a big difference to the longer term economic outlook.
For now, uncertainty reigns as we wait to find out if the property market cycle wins out over the economic shock we have just witnessed but there is still plenty to feel positive about in the future. We are currently 2 years away from the next property market peak.
We won’t leave the European Union according to some commentators until at least 2019. Until then it will be business as usual. Is now the time to be cautious?