Real Estate Investor Magazine South Africa November 2018 | Page 38

MARKET CYCLES
Can we predict when to
invest in Property?
BY BARRIE SWART
I
n 1999, after years of stable property growth, an econ-
omist called Fred Harrison predicted that the market
would experience a crash in 2007 or 2008. Although he
was largely dismissed by his peers, he was proven right as the
property market (and virtually the global economy) sunk into
a devastating recession. What many of us don’t know is that
Harrison’s prediction dates back to a theory from the 1930s
that, using historic data from hundreds of years ago, claims
that booms and crashes always run in 18-year cycles. Accord-
ing to Harrison, savvy investors using the cycle as a guideline,
can predict exactly when to buy and when to sell property, by
just using your calendar as a guide. But is he still right?
Economic cycles do exist. Growth is fueled by increased
income, which leads to a great demand for housing and
commercial property, which drives up land value (also known
as economic rent). The industry starts scrambling to capture
the climbing land value through construction activity, and
the banks start lending accordingly. These investments,
however, are made purely on the hope of a yield, rather than
continuous income (such as rent). When land value starts to
fall, building activity tends to stop, credit dries up, the banks
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NOVEMBER/DECEMBER 2018 SA Real Estate Investor Magazine
that lent against the climbing value of land start to suffer and
bad debt abounds – hence a recession or depression.
Harrison’s theory is that there are always seven years of
steady growth at about 5%, followed by small crashes, a
period of rest and seven years of rapid double-digit growth
preceding a crash. It seems as though making it big in the
property market is as easy as marking your calendar in
anticipation. South Africa did have a housing boom from
1999-2007, and if you do the math, it does seem like
Harrison was spot on.
But there are other factors that disrupt his theory
altogether. The escalating electricity prices, the fall of
commodity prices, Brexit, corruption charges. Our economy
has been volatile for years, and peaks and troughs are harder
to spot. Instead, it’s best to focus on different indicators that
the market is shifting, and invest accordingly:
The Opportunity Phase
The boom has busted and the market is reluctant to invest.
Cheap bargains abound due to media doom and gloom as
investors sell to avoid further losses. Prices fall and “fire sales”