The Real Estate Cycle
There can be no argument about whether or not there is a real estate cycle, as evidence of it abounds, and in one way or another, it has affected almost everyone. The only argument about the real estate cycle can be in its length or duration. The purpose of this section is to present the case I propose as to its length of 18 years. Just because the most recent evidence regarding the real estate cycle has been 18 years long, should we expect the next peak to be 18 years after the 2006 peak? The answer is yes, because the real estate cycle has been that long, on average, for the last 100-plus years.
In an article titled “The Great 18-Year Real Estate Cycle,” Steve Hanke posits that peaks in land values, housing construction, and the business cycle are highly correlated. He references a table from Fred Foldvary’s The Depression of 2008, which I show below as Figure 1. Hanke states: “These data talk, and the most interesting thing they say is that every 18 years we can expect the culmination of a credit-fueled real estate and ensuing business cycle. This, of course, doesn’t imply that all recessions are preceded by a real estate cycle. It only says that all real estate cycles have spawned economic downturns.”[1] The most interesting thing from my perspective is how regular and consistent this cycle is (see the second column interval values).
Figure 1. The Great 18-Year Real Estate Cycle[2]
What is missing from this table is the time period between the peak of real estate prices in the 1920s and the peak in the 1970s. Dewey and Dakin, whose book Cycles: The Science Of Prediction was published in 1947, had definitive statements on the 18-year real estate cycle with respect to the Great Depression years through World War II and the return of the veterans. They stated that real estate boomed from the end of World War I in 1919, peaked in 1925, and then dropped to a low point in 1933. Falling real estate prices had been accelerated by the onset of the Depression in the early 1930s, but by 1933, prices had stabilized. The next upswing of the real estate cycle was launched with the implementation of the New Deal and all the government programs it instituted.[3]
Dewey and Dakin further stated that government activity in the building of public works for dams, power plants, and other major infrastructure improvements added to the volume and breadth of the real estate upswing. Building activity peaked in 1940, after which the United States became involved in World War II in 1941. With the outbreak of war, “…building of homes and farm structures had to cease almost entirely, under government decree – the famous L-41 regulation of the War Production Board.” However, after the end of the war, there was so much pent-up demand and a “swollen mass of income” that the next upswing of the real estate cycle was inevitable.[4]
[1] The Great 18-Year Real Estate Cycle, by Steve H. Hanke, Globe Asia, February 2010
[2] The Depression of 2008, by Fred E. Foldvary, 2007, The Guttenberg Press, Berkeley, California
[3] Cycles: The Science of Prediction, by Edward R. Dewey and Edwin F. Dakin, 1947, Henry Holt and Company, Inc., New York, New York, page 124
[4] Ibid, pages 125-126