18 year cycle? My earhole. Plus Halifax price index, inflation and lenders’ SVR info #property

Hello prop onomics people and welcome to a longer macro blast on Thursday the 8th of February 2024 bit longer today because I wanted to also talk a little bit about the 18-year property cycle and The Economist Fred Harrison who is the author of that theory um I wanted to

Start with that if I could so the 18e cycle basically says every 18 years there’s going to be a significant graped reset or crash in the housing market in the UK um and someone asked me the other day on this Channel what I thought of it

And I said in a very brief comment I didn’t think much of it at all now I don’t think much of the theory I do like Fred Harrison who is the chap who came up with the theory in the first place um you have to give him credit he said as early as

1997 that there would be a peak of the market cycle in 2007 and there was of course now he didn’t say why and of course everything that played out after 97 basically the labor government policies although this isn’t a particularly political point I doubt the conservatives would have handled things

Any differently and certainly if you looked over in the US where they had a more conservative Administration during the vast majority of that time they didn’t handle anything any differently and it still led to the great financial crisis but if we hadn’t had over expansion of credit for example at an

Unmanageable level if we had had proper regulation and proper attitudes towards things 2008 wouldn’t have happened in the way that it did and there wouldn’t have been that cycle you can’t really have the bust if you haven’t had the boom and this is a point that I’ve been

Making constantly for the last year or so um you’re not going to get this massive bust because this 25% increase in house prices very roughly that we had over the period of the covid cycle has essentially now been matched by inflation and matched by wage inflation and matched by every other form of

Inflation that there is on record so this 25% rise is not a rise at all and then on the back of a decade like the 2010s where 54% of the properties in the UK went down in value in real terms after inflation adjustments more than half the property in the UK went down

Now if you live in London if you invest in Bristol if you’re involved in the Oxford and Cambridge markets for example it didn’t play out like that it certainly wouldn’t have felt like that although of course London had its uh day in the sun between about 2010 and

2014 if we’re talking about prime 15 or 16 if we’re talking about other parts of London and had been pretty stagnant before then before the covid bump along which like I said there’s only really been um a real terms break even um not a real true increase so the cyle says in

In some detail or the theory says you’re looking at sort of seven years of a boom phase then you’re get this is the the first phase of the cycle um recovering after the last problem then a midcycle wobble or a dip as Fred calls it um it

Might last one to two years um then you’re back into that boom so you’re talking another another seven years um so you’re talking about years 7 to 14 and then the winners curse so ultimately right at the end when everybody starts to get involved this is the time when

The taxi driver is telling you um he’s buying B tetes and not putting much money into them and things like that that’s the classic uh and then you’ve got the crash the recessionary phase and we’re talking about four years according to Fred now if you look at the last 18

Years of the UK property cycle that’s just not how it’s played out at all you had the crash in 2007 it really took till about 2012 2013 in some parts of the UK for things to take back off but in London it was much much faster than

That um even in Bristol really the green shoots were 2014 and then there was that boom phase um was there a midcycle wobble well or did the pandemic just mean that all bets were off you know you tell me um and then now we should be in

A boom phase again now this second boom phase uh as it’s playing out I do happen to agree with with at the moment I’m not convinced it’ll be S years long by any stretch I just think we’re going to be looking at catching up with inflation in

Real terms and if we have a continually well regulated uh lending market then we’re not going to have a crash at the end of it and this is why we didn’t have a crash last year because there hadn’t been the boom phase there’ve been a nominal boom phase but that is not

There’s nothing to do with it the nominal booms don’t really matter inflation adjusted booms are what matter and if you go back actually and try and apply that logic to the 1950 60s 7s ‘ 80s ’90s the 18-year thing doesn’t actually fit there are bits and Bobs

Where it’s correct and there are bits and Bobs where it’s wrong now Fred himself is an eminent Economist and you have to give someone credit who called a a peak in 2007 10 years before although I’d like to know lots more about exactly how and why and what he said was going

To play out because it’s all very well making terrible predictions about this that and the other but why that’s the reasoning we need to watch and what do we need to be watching and obvious that’s some of what I try to achieve with proper nomics but we are talking

About an Oxford and the University of London educated preeminent Economist who also has written quite a lot of books and articles on the back of the 18-year property cycle and the cynic in me says well that’s what you need isn’t it as a joural economist you need a bit of a

Hook you need a bit of a thing for people to get behind something they’ll remember you for and Fred when he’s gone because he hasn’t pass yet happily um he’s around 80 years old um will be remembered for the 18year property cycle whether it’s right or wrong but I think

I’m afraid it is data mining nonsense it’s looking back too much it’s not giving reasoning behind why things have happened the way they do and I do think the market has behaved differently whether markets behave differently over time is it a different kettle of fish because crypto didn’t behave any

Differently from tulips in in uh 1600s in the south sea bubble so bubbles still happen and in uninformed still lose their money and Retail punters still lose their money but ultimately the regulations that have been put around around certainly the bellet side of things particularly since sort 2016 2017

When the P have got heavily involved have regulated the sector to a bit of a damp squib on its own it’s no longer delivering those sort of super normal profits that people were used to making I still happen to believe it’s the best major asset class of them all because

The volatility is so low and the utility is so high but Fred also disagreed that supply and demand was of of much impact in property circles he wasn’t too worried about the number of houses being built and again I can’t strike a line through that he said it was really about

Speculation and credit but of course he was making a lot of these comments when credit was easier to come by and there was a speculative credit bubble and that’s not what we’ve seen we might have seen a speculative um stimulus bubble after covid because so much money was

Pumped into the economy I could get behind that does that mean a house price crash no I don’t think it does but anyway so onto the business of yesterday morning which was the Halifax house price index release and the forecasters have woken up a bit their consensus

Forecast was 8 on the Halifax house price index and actually achieved 1.3 so 1.3% month on month on the back of 1.1% the month before so it looks a market in absolutely rude Health at this time of year and the Halifax are now saying house price is up 2 and a half% year

On-ear so I’m not sure if they want to maybe go back and revise their terrible predictions from December when they were saying house prices were 4 4% this year because by their own index they’re now going to need to fall 62% from here and that’s going to need a really

Significant event to do that now of course if you believe that inflation is under control like the rest of the commentators seem to be doing at the moment in spite of significant evidence to the contrary because we’ve got councilors putting up council tax 10% we’ve got an 11 and a half% increase in

The costs of employee minimum wage staff that’s coming down the pipe in just a couple of months time I can’t understand why everyone thinks this is so far under control all we’ve had is food prices come back to sort of roughly where they should be 25% up on the old days and

Fuel prices come back to roughly where they should be 25% up on the old days all the risks remain to the upside geopolitically so what’s changed in this situation and I don’t think you’ve got real appetite to keep inflation under 2% by any stretch of anyone’s imagination because apart from anything else the

Bank of England do have the remit of looking after the financial stability and security of the UK and some of that would be allowing the debt to be infl ated away you’re never going to hear them say that at an after dinner speech or anywhere in writing but now the

Treasury love it even more because they’re the net recipients of these Frozen thresholds and everything that’s going on but the bank of England can’t see much downside to Reg you know fairly regulated inflation for them 2 to three looks good or a 2% forecast as I said at

The weekend within 3 years is good enough for them to be doing their job as has been deemed by the UK government so it’s kind of can’t BL blanch to stay at around 3 or 4% if needs be and I’m still pretty convinced that’s where inflation

Is going to be this year um there was a three-year treasury guilt yesterday an auction uh and the yield was 4.13% on those bonds so that’s up on the last time but I’m not surprised it’s up it’s up about 30 basis points on the last time that they issued some three

Years um why is that well the yields essentially have hardened a fair bit since then and then we also had the release of the BBA mortgage rate which is the big Banks reporting the mortgage rate that people drop off onto their standard variable rate or whatever

Whatever you want to call it and that svr is still at 7. 96% which looks a bit price gouy to me to be honest with you folks you’re not dropping that as quickly as maybe you should be uh and that’s the same as the previous print

For that which is that just under that 8% Mark but pretty punishing if you’re not on a fixed term so you might want to consider remortgaging if you’ve got any variable rate mortgages thanks