THE 100 YEAR OLD CRYSTAL BALL

Homer Hoyt was somewhat of a prophet based on his observations of property cycles. Observations such as when population growth surges there is a sudden increased demand for property. That increased demand inspires a sharp rise in rents, which results in a higher economic value of property due to the greater financial returns available from rent. Bare land values also increase too because of higher development margins available to construction firms resulting in a significant increase in the construction of new buildings. Finally, an eventual oversupply of property typically results in rent reductions and subsequent property price erosion. The level of new dwelling construction then plummets and in time results again in a housing shortage setting the stage for the same cycle to recur resulting in rent and value rises etc.

This same predictable pattern can still be evidenced in property markets today.

It is true that no-one has a crystal ball to forecast property value movements accurately.

However the past is littered with a plethora of clues that give a reasonable indication of expected value movements in the short to medium term. Property cycles are relatively predictable, much of the time, as they tend to follow a basic long-term overarching, repetitive cycle of recovery, boom, and slump phases.

This cyclical pattern was written about over seventy years ago by Homer Hoyt, ‘the grandfather’ of the property cycle concept. In his book 100 Years of Land Values in Chicago, written in 1933,1 he analyses the movement of Chicago land values, and noted that a recurrent succession of causes and effects impacted on these values during the one hundred years from 1830 to 1930.

Hoyt concluded from his observations and analysis that a pattern of a property cycle certainly existed and he identified some of its typical key drivers. This is about as close to a crystal ball you can get.