The 18-Year Property Cycle (and How It Can Instantly Make You a Better Property Investor)

Updated: Mar 11

35 years ago, an upper-middle class family was excitedly viewing a bungalow in Taman United. They had seen properties in other posh localities in Kuala Lumpur, but this particular house resonated with them. They loved it.

The head of the family, a managing director at a multi-national pharmaceutical company, had some concerns. Taman United was off Old Klang Road. At the time, this road was a small dual lane road with shabby wooden houses and shops on either side. The road leading to Taman United was a "red light" area.


The icing on the cake was a rubber factory not far away that excreted a strange odour.


But his family loved the house in Taman United and so the deal was done. The man bought it.


Over a period of 35 years and 3 recessions, this house appreciated from RM350,000 to a market value of RM2,800,000. That is a 700% increase or an annualised appreciation of 6% per annum. This was despite one of the worst depressions in the middle - the 1997 Asian Financial Crisis.


Why and how did this happen?


How can this information make you a better investor?


Long-term property trends are pretty predictable. In fact, understanding how real estate cycles work, will instantly put you in the right mindset for success. But first...


What is the Real Estate Cycle? Is There Such a Thing?


The property market is cyclical and the long term direction is up...


...at least for the next 60 years (property prices may not go up forever).


One of my favorite property analysts, Dr. Daniel Gambero, taught me that the property market is closely related to the economy. If you know your Economics 101, the economy is cyclical - there's a boom followed by a bust. Specifically there are 4 stages:

  1. Expansion - the period of growth

  2. Peak - the stage where the economy cannot grow further

  3. Contraction - the bust

  4. Trough - the bottoming out of the market


The property market also goes through this cycle. The good news is that these cycles are predictable to some degree (note: It's near impossible to know EXACTLY when the market progresses to the next stage).


Understanding this is important. If you do, you will not panic every time the property market goes down and be overly excited every time it swings up. You will anticipate such things as the normal motions of an economic cycle. You may now be wondering if property investment is a zero-sum game since it is cyclical.


Let me go ahead and answer you straight away.


No, property investment is not a zero-sum game. This is because the highs of every cycle is higher than the last. Therefore the general trend is upward.


As long as land is scarce the trend will be up. There is only so much land on Earth. Unless we go into another ice-age, solid surface on earth is not going to increase.


On the other hand, the human population is increasing. If anything, this increase is becoming faster. In the one hundred years between 1900 and 2000, the world population grew 3 times faster than the entire preceding history of man. We are currently over 7 billion people.


This is a situation where demand is increasing for a commodity that is finite. The laws of demand and supply unequivocally state that price will always go up when demand exceeds supply.


So the only way for property is… yes you guessed right, UP!


This would hold true for the next 40-80 years before world population starts declining. When this happens, demand will drop and prices may naturally contract.


What Is the 18-Year Property Cycle?


Some time in the early 20th century, Homer Hoyt, a real estate professional discovered that property prices are cyclical. He also realized that these cycles happened in almost perfect 18-year cycles.


Hoyt’s research was popularized by economist, Fred Harrison, in his book “Boom Bust.” Interestingly, the book written in 2005 predicted the 2008 housing crash in the US.


Harrison has been quite accurate in his predictions on the housing market on more than one occasion. He predicted that Britain’s housing market would plateau when the ratio of house prices to earnings hit 6.5. This happened in 2007.


The illustration below (edited) taken from Fred Harrisons’s twitter post on Febuary 4th illustrates this 18-year cycle.

The 18-Year Property Cycle

The cycle consists of 3-phases and a sub-phase within the first phase.


The first phase takes place after a crash and continues for 7-years. This is the recovery phase. In this phase, smart investors begin to see opportunities in the market after a crash and are willing to risk capital in the property market.


What is happening is that the market is now a buyer's market. There are many good deals. Prices have not appreciated very much in the last 4 years or may have contracted and buyers are able to source properties at what they perceive as attractive prices.


Many developers have adjusted their products to meet current demand pressures and may be offering great incentives, slowly driving more people in to the market. During the recovery phase, appreciation of 5-6% is normal.

Along the way, somewhere between the 5th and 7th years of the recovery phase, there is a mid-dip. Perhaps, investors who got in early in the recovery phase start divesting to realize profits and there is more supply in the market.


A majority of investors, having only recently witnessed a crash, may predict another meltdown in the mid-cycle dip, but this does not happen. Instead, after this short dip the market goes into the explosive phase.


The explosive phase lasts another 7 years. In this good time, appreciation can be in double digits. Sentiment is running high and many young investors entering the market here, may not have recollection of the last crash.


The last 2 years of the explosive phase is known as the “Winner’s Curse.” If there is a bad time to buy properties, this is it.


This is when the market is at its peak. Investors who enter the market here would almost quickly see a drop in value and it would take a considerable amount of time to recover. This happened in Malaysia circa 2013. A large majority of people who bought in this period have not seen an increase in capital.


When the “Winner’s Curse” is taking place, it not uncommon to hear grandiose construction projects in the making like tallest buildings, largest shopping mall and so forth. Think of the Twin Towers, KLIA Airport, and Putrajaya in 1995-98 or the plans for TRX, PNB118 and 8 Conlay in 2012-2014.


The next phase is the recession phase and lasts 4 years. This is the crash and recovery period of the property market. Banks tighten credit, interest rates go up and a new equilibrium is reached.


In this phase, sentiment is low and the majority of people will be expecting "things to get worse" almost perpetually. If you look at the available data though, you'll know that these stages are not forever.


Malaysia and the 18-Year Property Cycle: Some Proof


Applying this cycle in the context of Malaysia, we can see a pattern that closely follows Fred Harrison’s model.


Below is a chart I was able to take from CEIC on Malaysia’s housing price index from 2000 to 2018.

After the 1997 crash in Malaysia, a recovery is seen sometime in 2001. There was a major rebound before 2000 and a dip almost immediately which has its own set of explanations that I do not delve into here.


The recovery phase takes place between 2001 to 2008 with a mid-cycle dip happening somewhere in 2004. In 2008 where the explosive phase is supposed to take place, there is another dip before a real good run, hitting double-digit growth in 2013.


The recession phase in reality kicks in by 2014 although I have marked the commencement at 2015 following Fred Harrison’s convention. If the cycle follows the 18-year model, a recovery is due in 2019 or 2020.


The Winner’s Curse took place in 2012-2013. This would have been the absolute worst time to buy.


Note that the first 2 phases did not happen in exactly 7 year intervals, but that is besides the point. The most important demonstration here is that there is a cyclical pattern. As long as you are aware of this, you will be able to make better decisions.


Detractors of the 18-year cycle (there are quite a number of them) mostly argue that the cycle does not happen in exactly 18-year intervals. I acknowledge this but it cannot be denied that the cycle exists even if not in perfect intervals.


Where Are We in the Property Cycle in 2020?


If the recovery of the last property cycle for Malaysia begun in 2001, we should have entered the end of the recession phase in 2019.


So far, data seems to corroborate this. In 2019, a number of respected analysts including Knight Frank noted that the property market had bottomed out using data taken from the National Property Information Centre (NAPIC).


NAPIC data is showing signs of a recovery taking place. In Q3 2019, residential property transactions rose by 2.1% year-on-year. Property values of affordable houses also saw increase in values.


Therefore, in 2020 we're probably at the early part of the recovery phase.


Can You Survive a House Crash By Understanding the 18-Year Property Cycle?


This is the interesting part of the 18-year property cycle - it is a tool for surviving a house crash and maximising your investment returns.


Does it give you a crystal ball to tell the future? I don't think so because it's difficult to tell with foresight the start point or end point of these cycles. Each phase may be unique in terms of movement from cycle to cycle.


You can see this in the example of Malaysia above. However, it does glean some important insights.


Firstly, the recovery phase in every cycle usually starts higher than the last recovery phase. Typically, the highs of the current cycle is higher than the previous cycle. This has a significant implication. It indicates that it's almost always a good time to be buying property with the exception perhaps of the Winner’s Curse period.


Secondly, the 18-year cycle prepares you for ups and downs in the market. It is normal for the property market to have booms and busts. It doesn't work to your advantage to panic and make decisions you normally wouldn't. A bust is most likely going to be followed by a boom.


And here's something more interesting. Research suggests that recoveries are always higher and faster than expected. After the 1997 Asian Financial Crisis that hit Malaysia's property market hard, the subsequent rebound was faster than everyone expected with such a good run from 2009, that the vast majority of buyers and developers completely forgot that a contraction would come again.


Similarly, the rebound after the 2008 housing market crash in the US was fast and high.


Thirdly, never over-leverage. Leverage is highly risky. This means borrowing from the banks. Many property investors love to take 90% or 100% loans. This maximizes your returns from appreciation. However, high-leverage usually means poor cashflow.


At a time where rental yields are 4% and below, borrowing up to 90% to finance your property purchase could mean you are negatively geared or bleeding money. This is not a good situation, unless you have enough income to cover the shortfall. If you are unable to hold on to your properties, you cannot weather the cycles and can end up losing.


It is not so much the fact that you are negatively geared that is the problem. If you can afford the outflow of cash and you have bought a property on good fundamentals, the combination of leverage and appreciation can net you phenomenal returns.


It is your holding power that is the issue.


As long as you are able to hold a property indefinitely, boom or bust has no bearing on you. You can pick the most advantageous time to sell. However, if you are unable to hold on to a property due to cash flow constraints, you may be forced into a sale which may not benefit you.


Finally, most of the time it is good to be doing the opposite of what the majority are doing. For example, in the recovery phase, most people will be staying out of the property market except for the smart investors. When everyone is selling, they start buying.


In a research paper by Phyrr, Roulac, & Waldo (1999), they make a very important observation about property cycles. This alone can make you hugely successful as a property investor. The observation is this: good timing and a degree of contrarianism are essential ingredients to being successful in the market.


In this context, as the cycle is approaching the Winner’s Curse, everyone will be buying but smart investors will be holding or selling off their least attractive portfolios.


Earl Nightingale, one of the best motivational speakers I know had this to say, “Look at what the majority of people are doing, and do the exact opposite, and you’ll probably never go wrong for as long as you live.”


The 18-year property cycle is a fantastic basis for you to understand how the market evolves. If up until now you've been distracted by the siren song of the market (which can be confusing and scary), understanding the 18-year property cycle will change that.


Once you know that the market is never in a perpetual recession or in a perpetual expansion, your expectations become different. You know that the cycle is normal and that the general long-term trend is upwards.


Now you never have to fear a recession and neither will you be very ecstatic in an expansion. In fact, you'll be able to time your self better and reap greater returns from the market.


Always think of this cycle when thinking of the property market

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