How long is UK property cycle?
| Published date | 03 July 2017 |
| DOI | https://doi.org/10.1108/JPIF-10-2016-0083 |
| Pages | 410-426 |
| Date | 03 July 2017 |
| Author | Arvydas Jadevicius,Simon Hugh Huston |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
How long is UK property cycle?
Arvydas Jadevicius
Amsterdam, The Netherlands, and
Simon Hugh Huston
The Royal Agricultural University, Cirencester, UK
Abstract
Purpose –The purpose of this paper is to assess the duration of the UK commercial property cycles, their
volatility and persistence to gauge future market direction.
Design/methodology/approach –The study employs a novel approach to dissect cycles in a form of a
three-step algorithm. First, the Hodrick-Prescott de-trends the selected variables. Second, volatility
(measured by the variance) screens periods of atypical fluctuations in the series. Finally, the series is
regressed against its past values to assess the level of persistence. The sequential steps screen the length of
the cycles in UK commercial property market to facilitate interpretation.
Findings –The estimates suggest that UK commercial property market follows an eight-year cycle.
Combined modelling results indicate that the current market trend is likely to change over the coming year.
The modelling suggests increasing probability of a market correction in late 2016/early 2017.
Practical implications –This updated appreciation of the UK commercial property cycle duration allows
for better market timing and investment decision making.
Originality/value –The paper adds additional evidence on the contested issue of UK commercial property
cycle duration.
Keywords Property, Market, Volatility, Cycles, Commercial, Filter
Paper type Research paper
1. Introduction
Over the last century, a series of downturns badly afflicted the British economy and
underlined the issue of cycles (Barras, 2009). The very notion that the property market is
cyclical implies that, whilst not deterministic, it has a rhythm ( Jadevicius and Huston, 2014).
Research either focused on investigating the cyclical hypothesis itself (Case and Shiller,
1994; Rottke and Wernecke, 2002) or on modelling its pattern to better inform investment
timing decisions and help cut associated risk (Pyhrr et al., 1999; Mueller, 1999, 2002).
Numerous techniques were employed to screen cycle’s duration. Empirically, frequency
domain and simultaneous equation modelling processes dominated. In the UK, Barras (2005)
identified four major commercial property market cycles:
(1) 4 to 5 year cycles directed by the classical business cycle phases;
(2) 7 to 10 year cycles related to changes in equipment investment;
(3) 20 year cycles, linked to large building and transport investments programmes; and
(4) 50 year waves, related to major technological innovations.
The current study re-examines the UK commercial property cycle duration and so
contributes to market understanding. It employs a novel three-step algorithm, which
tightens analysis. First, the selected series is de-trended using the Hodrick-Prescott (HP)
filter. Next, volatility is computed to screen out periods of atypical fluctuations in the series.
Combining both techniques generates the UK commercial property market cycles’length.
Finally, volatility series are auto-regressed to gauge series persistence and future UK
commercial property market direction.
Journal of Property Investment &
Finance
Vol. 35 No. 4, 2017
pp. 410-426
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-10-2016-0083
Received 27 October 2016
Revised 23 December 2016
10 February 2017
Accepted 15 February 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The authors would like to thank anonymous reviewers for their suggestions regarding this
manuscript. All views and errors are those of the authors.
410
JPIF
35,4
The remainder of this paper is structured as follows. Section 2 reviews the previous
studies in the discipline, acknowledging property cycles research chronology,
various property cycle theories and the application of econometrics to the field. Data are
presented in Section 3. Section 4 introduces the methodological set-up. Section 5 presents
modelling estimates. Section 6 concludes the study.
2. Literature review
Historical perspective
Academic scrutiny of property cycles extends back to Cairncross (1934) and Hoyt (1933) but
whilst extensive it remains inconclusive (Reed and Wu, 2010; Grover and Grover, 2013).
Initially, researchers, inter alia, Hoyt (1933), Newman (1935), Lewis (1965), Abramowitz
(1964) and Gottlieb (1976) considered property/building cycles purely a local phenomenon,
mostly independent from the wider economy. Parallel UK studies by, inter alia, Cairncross
(1934), Shannon (1934), Bowley (1937) and Bowen (1940) identified population change as the
primary driver of housing demand. For these early studies, a sudden surge in population or
migration into propitious industrial locales drove property/building cycles.
Over time, cyclical understanding matured. Rather than merely a reflection of human
transit, later cyclical investigations saw property market fluctuations in their wider
business/economic context (RICS, 1994; Barras, 2009; Barras and Ferguson, 1985; Grebler
and Burns, 1982; Wheaton, 1987; Barras, 1994; McGough and Tsolacos, 1995). A seminal
study commissioned by the Royal Institution of Chartered Surveyors (RICS, 1994) jointly
with the University of Aberdeen and the Investment Property Databank (IPD) confirmed
significant interplay between property and economic cycles. However, spatial and other
distinctive features of property muddy the waters, so economic factors are not the only
drivers of real estate cycles. The built-in construction lag is one key idiosyncratic feature
underpinning the property cycles.
The other factorof increasing significance isinternational capital flows.Increasingly, cycle
studies havetended to analyse the dynamics of the propertymarket on a global scale. For one
thing, global diversification became an essential consideration for an efficient property
portfolio (Chen and Mills, 2005). Researchers, inter alia,Caseet al. (1999), Jackson et al. (2008)
and Stevenson et al. (2014), explored concordance in global property market cycles and a
possible existence of a single cross-continental property market. Despite structural market
diversity and different dynamics, property commentators nevertheless queried whether
geographic distance guaranteed diversification. In case of office markets in London and
New York, Jackson et al. (2008) found significant convergence between two metropolises.
Ironically, it turns out that a cross-border or trans-continental investment strategy could
actually undermine diversification.An extended view presented by Stevenson et al. (2014) on
20 of the world’s largestoffice markets reachedthe same conclusion. Their findingsreported a
notable concordance across a large numberof markets. The risk of contagionfuelled growing
demand for international property market comparative data and spurred organisations in
likes of Dow Jones (2015), FTSE (2015), MSCI (2015), Knight Frank (2015), S&P (2015) to
construct global property benchmarks.
Family of cycles
In parallel with empirical investigations, property cycle theory developed. Four types of
cycles with varying ontologies emerged (Ball et al., 1998; Barras, 2009; Jadevicius and
Huston, 2014). The so called “family of cycles”(Barras, 2009), include Kitchin (1923) cycle of
three to four years of duration; the Juglar (1862) cycle lasts anything from between seven to
ten years; much longer the 20 year Kuznets (1930) cycle; and “Kondratieff waves”
(Kondratieff and Stolper, 1935) lasting around 50 years.
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