35.242G GRADUATE PROJECT

THE 1974 COLLAPSE OF THE PROPERTY MARKET IN

John VANDER HAVE ( i )

CONTENTS

Synopsis

List of Tables iii

1 Chapter 1 PRELUDE TO A BOOM

Q Chapter 2 THE HALCYON DAYS ,

Chapter 3 THE DEMISE 14

Chapter 4 CASE STUDY: MAINLINE CORPORATION 24

Chapter 5 CASE STUDY: HOME UNITS AUSTRALIA 34

Chapter 6 THE FALLOUT 37

Chapter 7 THE ENSUING YEARS 41

Chapter 8 COMPARISONS WITH THE PROPERTY MARKET IN 1989 50

57 References ( i i )

SYNOPSIS

Sydney real estate is the most expensive in Australia. Over the past forty-five years it has also experienced more frequent and dramatic bursts of inflation in property prices than any other city in Austra Ii a. One such burst has occurred over the past two years

[mi d-1 987 to mi d-1 989] •

A similar burst of inflation in property values occurred in Sydney in the early 1970s. This burst in Sydney property values in the early 1970s was followed by a dramatic collapse in property values in 1974-75. This graduate project traces the story of that collapse.

The case studies of two prominent developers and contractors

[Mainline Corporation and Home Units of Australia] are presented.

The aftermath of the collapse in the years up to 1979 is examined.

A comparison of present market conditions with those prevailing in

1974 is also presented. ( i i i )

LIST OF TABLES

1 • Residential Construction and Land Costs, Sydney, 1970-1975 p3

2. Office Construction Approvals and Finance Company Advances for Commercial Construction 1972-1975 7

3. Interest Rates on Home Loans, December 1975 19

4. Housing Construction Costs in Australia, September 1975 20

5. Increase in Rent a Is from December quarter 1974 to September quarter 1975, Sydney Residential Property 21

6. Australian Residential Land Costs, January 1976 40

7. Increase in Average Va I ue of Houses June 1978 to June 1979 43

8. Building Approvals, Aug 1975 to Aug 1976 44

9. House and Dwelling Approvals in Australia 1973-1975 45

10. Large Bui Id i ng Commencements in Austra Ii a, 1973-1976 46

11. Increase in Residential Land Va I ues Sydney, 1939-1979 47

12. Non-dwelling work levels, NSW Building Industry, 1968-1977

13. Recent Share Price Movements of Hooker Corporation Limited 53

14. Austra Ii a' s Leading Developers and Contractors 1988 55 1 PRELUDE TO A BOOM

Sydney in the years 1968-74 saw a boom in property v a I ues previously unprecedented in its history. It involved extensive dealing which saw the shape of the central business district transformed. The supply of industrial· and retailing space was expanded. The city's fringe expanded outwards.

The boom ended in a spectacular collapse in 1974. This collapse saw the demise of large development and construction companies and financial institutions. The shock waves from this collapse wer~ felt for the rest of the decade.

To own one's own home, freestanding on a quarter acre block, has been described in the great Australian dream. This dream, along with supportive p Ianni ng policies, resu I ted in an expansion of suburban Sydney in the late 1960s. During this boom period finance companies, building societies and merchant banks challenged the sovereignty of the major banks, in providing finance for residential development.

The origins of the boom were complex, and relate part I y to various

political and financial developments, in both the nation al and

i nternat ion al arenas, over many years. In a more immediate sense,

the boom was a natural culmination of a long upward trend in

values which had occurred since the end of World War 11.

In 1950 the medium price of a block of land in Sydney was $690 • • 2

and the median price of a house on land was $4670; by 1966 the respective prices had risen to $5020 and $13040, and by 1974 to

$20200 and $33500. Thus, in the 16 years to 1966, housing prices multiplied 2.7 times, and then a further 2.5 times to 1974; of greater consequence, the price of land increased 7.3 times between

1950 and 1966, and then a further 4.2 times up to 1974. In 1950 the

I and component made up 14. 7 per cent of the median price of the house-on-land package; in 1966, 30.8 per cent; and in 1974, 60.0 per cent (1).

The rise in prices up to the I ate 1960s was I argel y the resu It of increased pressure on resources through popu I at ion growth and competition for sites near workplaces, transport, shopping and recreational facilities. As the city expanded, access to such facilities became more difficult: in 1950 the median distance from the central business district of a block of land traded was 18.3 kilometres; in 1966 it was 25.9 kilometres (2).

The need for better access to the city's facilities and the

introduction of strata titles resulted in a spate of higher density

developments which increased competition for sites and led to

increased prices. In 1960, multi-unit dwellings by the private

sector represented 30 per cent of total dwellings; this increased to

42 per cent by 1966-67 and then to 51 per cent in 1969-70 (3). This

trend to increased building of home units partly led to a reduced

supply of building blocks for houses. The number of lots registered

with the Registrar-General of NSW declined from 36120 in 1964 to

29485 in 1967 (4). • • 3

Table 1: Residential Construction and Land Costs, Sydney 1970-1975 from Sun Herald 14 Sept 1975 4

Sydney's population in 1966 reached 2.5 million, and was growing rapidly. This was partly due to the baby boom and partly to a high level of immigration. These factors contributed to the boom which began inn 1968.

The late 1960s and the 1970s saw increasing sophistication in the development of capital markets, with the growth of the Eurodol I ar and Asiadollar markets, and a shift of wealth to the OPEC nations.

With increasing scale and increasing sophistication syndicates of banks, often from different countries, became a popular means of financing large projects. Australia was soon locked into this international system. Sydney in particular began to rank as an international financial centre.

The early 1970s saw great developments in the field of merchant banking in Australia. There were also significant developments in the field of finance companies, with many of these supported by foreign banks as prominent shareholders and extenders of I ines of credit and stand-by facilities.

These banks, finance houses and related business activities were at

the centre of the boom in Sydney office construction which began in

the mid 1960s and accelerated during the mineral boom in the latter

half of that decade. Either directly through development companies,

or indirectly through finance companies, these banks and finance

houses channelled a large proportion of the foreign capital inflow

into the Sydney property market. Both commercial activity in the

central business district and residential activity in the suburbs 5 were buoyant. In 1967-68 a record 26681 dwelling units were built in Sydney; this increased to 33146 in 1968-69 and to 35228 in

1969-70 (5). Clearly the property industry was booming.

The then Treasurer, Mr William McMahon, pushed up interest rates to try and dampen growth. The weighted average rate on first mortgages moved up from 9.1 per cent to 9.8 per cent in 1970. The

Housing Commission of NSW proclaimed that the impact on the housing industry was serious and predicted a fal I in demand for housing.

The above policies were effective, and led to a fall in the number of new dwellings built in the years 1971-72 and 1972-73. The main affected area was that of new home units, which had been a very speculative segment of the industry. However the demand for housing continued, fuelled by a growth in Sydney's population abetted by the record intake of 683000 migrants into Australia between 1968 and 1972.

An indication of the increasing demand for housing is given by the increased demand for Housing Commission units, which moved from

28591 in 1969 to 32507 in 1970, and to 37641 in 1971 (6).

Thus, in spite of the government's efforts to curtail demand, the

appetite for housing funds was growing. Funds were sought from

sources other than the banks, not a bi y from the permanent bu i I ding

societies, which increased their housing loans dramatically in this

period. / ':)

The building societies drew their funds from the public by offering higher interest rates than the banks. The finance companies offered a variety of investment opportunities to the public, from debentures to unsecured notes, normally at higher interest rates than either the banks or the building societies. By 1972, the finance companies stood third behind the savings banks and the permanent building societies as suppliers of funds for home purchasing. Perhaps more significantly, the finance companies became the key sources of working funds for commercial developers in the city and the basic lenders to subdividers of residential land. One of the results of government efforts to dampen down activity in the property market was the growth of alternative sources of finance which could operate outside the controls which the government exercised over the banks.

In 1968 the State PI anni ng Authority of NSW released the Sydney

Region Outline Plan, which outlined development strategies for

Sydney unti I the end of the century. Staged I and release areas were proclaimed. The population predictions contained in the Outline Plan were proved wrong within a few years. Despite the release of 89000 potenti a I home sites between August 1968 and March 1971, demand

was still strong. The projections of the Outline Plan particularly

st imu I ated specu I ati ve buying by developers, who bought in

anticipation of future rezoning.

In 1969 the NSW Government introduced a betterment tax, which was

a tax on windfall profits made by landowners fol lowing a

re-zoning. It was set at 30% of the increased land value after 1 •• 7

.J

..

.J,- s 1871

.... •• :• ,• f ·, "·' -i· .• f;,• ' ....

Table 2: Office Construction Approvals and Finance Company Advances for Commercial construction 1972-1975 from The Australian 4 Nov 197f5 8

August 1969, and was intended to provide a fund for services infrastructure costs in new developments. In practice, the cost of this tax was passed onto the purchaser, usual I y a developer, and eventually on to the end-consumer, thus adding to inflation.

The increase in the price of land and housing had become a matter of serious concern by the early 1970s. The median price of a block of land had risen from $6720 in 1969 to $9233 in 1971. The average cost of a house jumped from $17068 to $21233 over the same period.

Land and house prices were increasing at an annual rate of 14 per cent and building costs were advancing at 9 per cent per annum.

The number of year's average earnings needed to buy a house in

Sydney rose from 1 • 7 in 1969 to 1 .8 in 1970.

In the budget brought down by the McMahon government in August

1972, income tax was cut by an average 10 per cent; increased

allowances were granted for dependants; and pensions and other

benefits raised. It was a recipe for i nf I ation. The country was

awash with money, and, following the collapse of the mineral boom,

property remained the one great focus of investors' attention. 9

2 THE HALCYON DAYS

For the first time, in January 1972, the median price of a block of land in Sydney passed $10000. This median price increased to $14300 by December 1972, and elicited concerned comment from the Treasury and others. In the frenzied field of property development the traditional roles of builder, developer, banker and financier became blurred, with aggressive competition among financiers to find lenders for their available funds. Joint ventures became increasingly common.

In the climate of worldwide inflation prevalent in the early 1970s, there was an increase of 7.3% in the cost of building materials in

Australia in the half year ending March 1973. Under the Whitlam government policies of the time, inflation rose to almost 10 per cent per annum. Deposits with banks and building societies increased, leading to increased funds being available for new construction. In early 1973 there was a flurry of activity in almost every segment of the Sydney property market. Demand for land was intense in both inner city and fringe suburbs.

The property boom attracted a stream of new entrants to the development field. For example, Leighton Holdings, traditionally a civil engineering and construction company, entered the fray. The

CSR company in July 1973 acquired 50 per cent of Sydney developer

Home Units Australia for $5 million.

Apri I and May 1973 marked the peak of the property boom. Land • • 10

prices in Sydney rose 5.5 per cent through April and 3.3 per cent in May to reach a median price of $15900 per block. A fever, spreading from Sydney through to south-east , gripped the east coast of Australia. The connections between the Sydney and the Queensland markets were very close, with the same agents financing activity in both areas. The Queensland market was even more speculative than that of Sydney and it was estimated that 40 per cent of the sales were to overseas buyers from Papua-New

Guinea, Hong Kong and Britain.

Various property companies floated on the sharemarket, with promises of a speculative boom reminiscent of the mineral boom. The

Australian Financial Review of 1 May 1973 proclaimed the headline

"Bui Id i ng Boom Boom'.'

The I abour market tightened noticeably, with a rise in unfilled vacancies. Wages continued to increase. Labour shortages and rising costs exerted further upward pressure on housing prices. The

Federal Government increased advances to State Governments for

welfare housing by 26 per cent over the previous year to $218.7

million.

The boom in the residential property market was para I leled by a

boom in the central city market, with the top six construct ion

companies committed to nearly $2000 mi II ion worth of work. In

Sydney 176700 square metres of office space was let in the first

ha If of 1973, more than the amount let for the whole of 1972. In

Melbourne, the Mair,\ine Corporation completed amalgamation of a 1.3 .... 11

hectare site in Collins Street at a cost of $16 million. In Sydney the CBA paid a record $8063 per sq metre for a site at the corner of George and Margaret Streets.

Developers and construction companies in August 1973 reported huge boosts in profits for the previous year. Hooker Corporation's earnings were up 38 per cent; Lend Lease's 76 per cent; Mainline

Corporation's 102 per cent.

The finance companies supporting the property boom reported similar profit rises. Mercantile Credits reported a rise of 28 per cent;

Mutua I Acceptance 22 per cent; Lensworth 10 per cent; ASL 25 per cent; CAGA 16 per cent.

General inflation in 1972-73 rose to 14.4%; the rise in the housing market in Sydney over the same period was 15.0 per cent. The average price of a house in Sydney rose to $26778 in 1973. At the same time there was a dramatic leap in the median price of a block of land in Sydney of 42 per cent.

In December 1972 Prime Minister Whitlam appreciated the Australian

dollar by 7.5 per cent, following this with a further 4 per cent

effective appreciation in February 1973. At the same time the US

dollar was devalued. Whitlam also strengthened restrictions on short

term overseas borrowings.

As a result of these initiatives there was a stamped of funds

leaving Australia. In the March quarter of 1973, $621 million flowed .12

out of Australia, after 11 years of continuous inflow. Money suddenly became tighter. These tighter money conditions led to intensified competition for funds. The banks and finance companies increased their interest rates. Funds began to be drained away from the building societies to the benefit of the finance companies and the banks.

The Treasurer, Mr Crean, in an attempt to restrict lending by the banks, increased the statutory reserve deposit from 6.6 to 7 .6 per cent. As a result of this monetary policy more people were pushed to the fringes of the capital market, and especially into the finance companies.

In December 1972 the NSW Government expanded the Housing

Commission into a Land Development Authority, rescinding the $1 million limit which legislation dating back to 1912 had placed on its land operations. The Housing Commission became yet another competitor scrambling for marginal residential sites. The Federal

Government favoured this setting up of land commissions, co-operatively funded by Federal and State governments, to help co-ordinate land marketing and land prices in the cities.

The Federa I Government's monetary policies began to have an effect

on the office developments of the city centres. Doubts emerged about

the demand for the vast volume of office space that was being

constructed. On 6 March 1973 the Australian Financial Review

carried a report claiming the end of the office boom. Cited as

evidence was the reduced profit of the Hooker Corporation. In Mid •• 13

1973 it was predicted that 93000 square metres of unlet office space would be coming onto the market at the end of that year, with a further 26000 square metres by the end of 1974. ••. 14

3 THE DEMISE

The Federal Government decided that tough measures were called for to control the total market situation. In July and August 197' 3 the statutory reserve deposit (SRD) requirements were raised a further

1 .4 per cent. In September Prime Minister Whi tl am announced that the Reserve Bank would be stepping up its selling of government securities, effectively mopping up liquidity and lifting interest rates. In addition, the Australian dol I ar was revalued a further 5 per cent against the green back. The money market was affected as banks called out money to cover the increased SRD and the repatriation of funds following the revaluation.

In an effort to protect home buyers the Federal Government limited the interest rates on the majority of housing loans from the savings banks to a one per cent rise from 1 October 1973. To achieve this the savings banks kept their deposit rates on amounts below $4000 to 3.75 per cent. Consequently, large numbers of depositors

withdrew their funds in search of higher interest rates. Deposits in

savings banks fell by $12 million in October 1973. This was followed in November 19793 by a 23 per cent fall in housing loans

by the banks. Approvals for new dwel I ings in the December quarter

fel I by 2050.

The Federal Government also lifted the ceiling on negotiable

certificates of deposit (NCDs) in October and the banks began to

offer eight per cent on three-month NCDs. This attracted corporate

investors away from the finance companies, which in turn pushed ., . 15

up their rates to attract new custom. On 26 September 1973, the market was rocked by Industrial Acceptance Corporation replacing the prospectus it had issued eight days earlier by a new one which offered a top rate of 10 per cent on three-year, first-charge debentures or two-year unsecured notes. Other finance companies began to fol low this lead.

The finance companies continued to attract funds. Money flowed into them at the expense of the savings banks and building societies.

This meant that the main source of funding for the land market was sustained, and land prices continued to rise. In December 1973 the median price per lot reached $18,000; the median price just two years previously had been only $9600.

Despite Whitlam's announcement of September 1973 of increased selling of government securities by the Reserve Bank, effectively lifting interest rates, expansionary activity by corporate developers continued unabated. Mainline Corporation, for example, reported a record of $270 million of construction work, a move into home building, a joint venture with Alliance Finance Group on a major development in Southern Queensland, and an expansion into the

United States.

All the property companies were highly geared and required a large cash-flow to sustain profitabi Ii ty. For most companies the cash flow

depended on a high level of sales, which was difficult to achieve

once money tightened. In October 1973 while the number of houses

in Sydney put up for auction increased by 18 per cent, only 39 per • • 4 6

cent of the houses were sold. As money conditions tightened, reserve prices were often not reached. The home-unit market became particu I arl y vulnerable.

Problem si gnats began to emerge. In one of the State's largest building contractors, Max Beck Constructions Pty Ltd, went into I iquidation with 664 unsecured creditors owed $1 .1 mi 11 ion.

Despite the continued rise in the price of land, problems had emerged in that sector of the market as well. On 26 October,

Treasurer Crean announced that the variable deposit ratio in relation to borrowings from abroad would be increased from 25.0 per cent to 33.3 per cent. This removed any chance developers and others might have had of overcoming the credit squeeze by

importing funds. On 31 October 1973 it was predicted that 'a growing army of property speculators is abrupt I y facing the prospect that within a few weeks they wi 11 be falling out of the money trees like falling leaves (7). On 30 November 1973, a headline in the Australian Financial Review proclaimed "Property

Sales Bubble Bursts".

In February 1974 the Chairman of the Australian Institute of Urban

Studies, Professor Gates, suggested that land prices in

cou Id fa 11 by as much as 50 per cent in the following six months,

which would have a flow-on effect to the Sydney market. This

prediction evoked angry responses from developers and others. • , .17

With the changes in the financial markets as described above, the banks I I iqui di ty position tightened, forcing big borrowers into the bill market. Some developers had moved away from their traditional sources of finance to seek more attractive roll-over accommodation of

90 or 180 days in the money market. As property sales slowed amidst a general downturn, these developers had trouble maintaining a sufficient cash flow to repay their short-term borrowings. By April 1974 the finance companies who largely supported the developers, were paying 15 per cent for money.

By the end of April 1974 some companies had begun to call on stand-by facilities. Local companies supplying such facilities had covered themselves with bonds or Treasury notes but most of the stand-by covers were being ea I led at the same time, so the bonds were not really saleable. In early May the finance companies were dominating the inter-company call market and were paying 15 per cent for over-night money. The dominance of the finance companies in the ea 11 market forced industrialists and property developers into calling down stand-bys and chasing 90-day money.

Bankers were also in a tight position. The Reserve Bank in early

May was injecting some liquidity back into the system by buying bonds, but at rates at which the banks, the main sellers, would take a loss. By mid-May the liquidity situation was most serious:

In late May, rates on negotiable certificates of deposit (N.t.Ds)

ranged from 16 to 20 per cent, with the prospect of their remaining

high as the banks had to find $700 million by early July to cover • • · 18

NCDs set at 9.3 per cent in February and March. Two trading banks were forced to appeal to the Reserve Bank for assistance.

In May 1974 finance companies were paying 19 to 20 per cent for call money. Bank bills hit a peak of 24-25 per cent in mid-June and rates for cal I-money went to 23 per cent. ·

The Australian capital market had not experienced such an upheaval since the 1930s. Since World War Two the pursuit of

Keynsian policies had made the housing and construction industry the traditional scapegoat whenever an attempt was made to take the heat out of the economy. Whitlam seemed to be operating in this tradition; when anticipating the policy of tighter money, he had said: 'If as a consequence the higher interest rates have the effect of curbing the speculative rush into land and property that wi 11 be a 11 to the good' (8). The scale of the boom of the 1970s was much greater than anything ever seen before. The boom had attracted the participation of leading financial institutions, who had supplied the developers and bu i I ders with funds. Tight money pot icies, designed

to curtail developers and speculators, were to have wide ranging ramifications.

As liquidity tightened in May, land prices on Sydney's fringe fell

by 14 per cent; housing prices followed; and 73 per cent of new

home-units remained unsold. Prices in the eastern suburbs dropped

by 15 per cent and on the north shore by five per cent. Prices

dropped less in the western suburbs, but agents in mid-June 1974

were reporting a 75-per cent failure-rate in achieving sales of • • 19

. . .. a·.--· ·. . ·' .. · ., . . . , ... CURRENI' JNTERFST RA.llS ON HOME LOANS .. - Commo~wealth;;ivings Bank;. : . : . '~•A-1;h· pc~ . . · ·Priva~ ·sllving$ 0 hanlcs · ·. 91/.2-11¼ pc · Permanent building societies:• ·NSW ···" 10-10''2 'pc Victoria 10-13 pc · Queensland 10¼-11 pc South Australia. ·10¼-11¼ pc Western Australia 10'/l-111/l pc· ·Tasmania 11 pc. pc . Life assurance offices .. 10-14 ··:'' · Finance companies . · 16 pc •interest rate rises as_Joan increases ..

Table 3: Interest Rates on Home Loans, Dec 1975 from The National Times 22 Dec 1975 20

HOUSE COSTS:.A NATIQN.U. SURVEY . ,: . .. >&ptember 1~ '' ' 1975 Oties _.; ·:Cost per' square· .: . ·; '·-' · · ·metre · · SYDNEY . . ·.. $180-220 , ~.:;,_~ · · ··. · 160-220 BRISBANE 170-21S ADELAIDE 160-170 PERTH .140-160 HOBART 190-220 ·--; <·'._;, ·,·190-~20·~ '., ~ Source: Commonwea1th·,.oank,, ,._ 1 J · · ·quarteriy housini '.'lurvers: · ., ·· , ·:. :

Table 4: Housing Construction Costs in Australia, September 1975 from The National Times 22 Dec 1975 · • • 21

• I · ' · · · ·· HOW ·REN'IS WENT UP .The line .ot figures following each capital city refers to the cost ot an unf umished three-bedroom house:The line below is the range of rentals charged on a two-bedroom unfurnished Oat. · ' ·, ·: · · December quarter, September quarter, ; ·. 1974 1975 Cties · Medium · ·<· • ,·Good Medium. . Good SYDNEY . $40-50 $50+ 45-60 . $55-60 35-40 .. 40+ 40-50 50+ MELBOURNE ~ : 34-45 : · 45+ 40-45 45+ ... 30-37 .; . ,· 37+ ,, 35-45 . 45+ ~RISBANB . ,, 45-50 . 5o+ · 40-50 50+ , · 35-40 , 40-50 · 35-45 45+. _{\DELAIDE .. ,,: . . 30-40 40+ 30-40 · 40+ 25-30 40+ 25-30 40+ PERTH · 26-32 42+ 30-38 45+ 23-25 28 · 25-30 35 HOBART 30-35 35+ 30-35 35+ 25-30 35+ · 25-30 · 35+ CANBERRA 35-40 45+ · 35-40 45+ , 28-35 35+· 28-35 35+ An,figures. represent an ·average figure, and variations must be allowed for· in choice localities. '' · · · · (Source: Commonwealth' Bank, Quarterly Housing Surveys.) .

. Table 5: Increase in Ren ta Is from December quarter 1974 to September quarter 1975, Sydney Residential Property· from The National Times 22 Dec 1975 •• : . 22

houses on their books. Approvals for new private dwellings fell by

7.9 per cent in June.

The first large company to experience major troubles was Leighton

Holdings which experienced cash flow problems in Apri I. Its shares dropped to 24 cents from a peak of $1 .37 and it recorded a loss of

$2.1 mi 11 ion for the first half of 1974. Leighton was saved through intervention by the AMP Society and the finance companies who feared a domino effect should Leighton col lapse. The same logic applied to a rescue bid in July by Hooker Corporation, Industrial

Acceptance Corporation and CSR for the troubled Home Units of

Australia Group.

That the malaise was not confined to a few companies, but was widespread soon became obvious. Various British-based developers in

Australia began to exhibit symptoms of trouble. In Australia it was not easy to detect the companies which were in trouble. On 3

August 1974, Mainline reported a profit of 57.8 per cent for the first half year; but it may have been 25. 7 per cent or 2.1 per cent depending on the accounting methods used. On 15 August, amid

rumours of a liquidity crisis in the company, Mainline's shares

p I unged to 40 cents and prompted a stock exchange inquiry. On 20

August the principal creditor, the ANZ Bank, asked for a receiver

to be appointed.

Other companies to experience problems included Cambridge Credits,

to which a receiver was appointed on 30 September 19794; also IAC

and Northumberland Insurance. • • 23

In September 1974 two big land and commercial property developers in Queensland, the George Stevens group and the Jack Roberts Co, had gone into receivership on 30 October another large Queensland building firm, Keith Morris, went into liquidation. On 2 October one of Austra Ii a' s largest home bu i I ders, Landa I I Holdings, went into receivership. In the month following the collapse of Cambridge, eight major developments projects valued at $135 mi 11 ion were abandoned. In early October there was a run on some building societies and the State Government was forced to give some

guarantee of support for financial institutions.

The property boom had ended. •• 24

4 CASE STUDY: MAINLINE CORPORATION

In the boom period of the 1960s, development companies were able to expand rapidly. A good example was Mainline Corporation, which began as a small construction company in 1961, constructing a block of home units in Double Bay. By 1965 Mainline has expanded to the stage of constructing the $10 mi 11 ion Gol dfiel ds House at

Circular Quay, fol lowed by a number of major office blocks including the AMP Centre, the IAC Building, and others. In 1970

Mainline took over Strata Holdings and thus ushered in an astounding era for the company. By 1972-73 Mainline was engaged in building or preparing plans for the Exchange Centre in Bond

Street, the Gateway at Circular Quay, and miscellaneous other high rise developments in the CBD, North Sydney, Neutra I Bay and Double

Bay, with other buildings planned for Canberra and other cities.

Mainline was involved in seven projects in Melbourne and also in

the creation of a new town at the side of the Nabalco aluminium

works in the Northern Territory. Mainline also expanded into the

United States.

It al I started when fresh-faced Dick Baker walked into the AMP

Society with a deal - to build Gold Fields House fronting on to

Sydney's Circular Quay.

Baker, backed by the wealthy and well-known O'Neil family in

Sydney, had obtained an option over the land, signed up

Consolidated Gold Fields, to be a tenant in the building and he

had a construction team ready to go. ..:25

It had al I the ingredients the AMP wanted and they signed up. The

Mainline construction team put the building up for $1½ million less than the cost that had been estimated and the AMP Society received a substantial portion of the benefit under the terms of the agreement.

Riding high on his initial success Dick Baker brought forward a series of other deals. All had the same theme - they were building projects with a sure tenant to provide a certain income when construction was finished. Al I of them did very wel I and Dick

Baker's standing in the AMP Society, which by now had some very attractive properties well leased, became very high.

When Mainline floated around 1968, the AMP Society realised the profits Baker had coming to Main Ii ne from construct ion contracts and from his share of some of the head lease arrangements and began buying the shares at around 80 and 90 cents. They eventual I y assembled 10 per cent of the capita I and the shares soared to become one of the most successfu I investments of the AMP

Society.

But Dick Baker soon became influenced by other situations which

were to affect greatly the course of Mainline and ultimately lead to

its receivership.

His greatest mistake was to listen to the British property developers

who came out here and saw Australia as a vast untapped market

for their investment funds. With them in mind, and a I so the 26

Australian institutions' enthusiasm for property investment, Baker changed his course and instead of only committing large funds to deals that were all tied up, he began assembling development sites without any group committed to buy.

That change put him on a course towards disaster - particularly as he used short-term money to buy the properties. Dick Baker did not read the changing property market. The UK companies suddenly discovered that Australia had a limited population and was about to have trouble absorbing all the office space being built. In any case UK property developers themselves ran into trouble. Australian institutions became strapped for cash because of the decline in the growth of life policy premium income and, most important of all, i nfl at ion had changed the economics of construction.

Had Baker spent more time in Australia in Mainline's final year, his admirers claim, he might wel I have read the signs better and not ploughed ahead on his new course. Against that, what turned out to be the wrong directions were based on very basic and very

I arge errors.

But Baker was married and devoted to his US-born wife who was a former Miss California. The family home had been established in

America and his children were being educated there. Mainline has

established a substanti a I venture in the US and Dick Baker's

personal situation may have been a factor in the move, although •• ~~27

the philosophy behind the expansion was that the group had achieved substantial growth in Australia and if this was to be maintained the company had to look to wider markets.

In the final year Dick Baker spent a large portion of his time in the United States working on the Squaw Valley investments of

Mainline.

Mainline shares reached a peak of $7.27 in 1973. It had commercial dealings with AMP, MLC, Colonial Mutual, and with many large finance houses such as IAC, CAGA, Lombard and Alliance, as well as with severa I merchant . banks. Such a wide variety of support was seen as a sign of Mainline's strength.

The glossy June 30, 1973 Mainline balance sheet with its many photos of senior executives clearly contained warnings a-plenty for those who cared to read the figures. The company had current

liabilities of $34.S million. The audited accounts showed currents assets of $39.8 mi 11 ion, which on the face of it seemed healthy. (In

accounting terms, a current asset is one which can be turned into cash within 12 months.) However, of that $39.8 million, $27.2

mi 11 ion was property held for resale. Most of that property was

bought in 1972-73 (14).

Property is not a current asset at most times although in the

property boom which was still raging at June 30, 1973 it could

perhaps have been described as one. "28 · -·

Within a year of June 30, 1973 most of those properties had become almost unsalable at book value and so Mainline then had current liabilities three times greater than its current assets. But Mainline continued its expansion, particularly in the US. Among its moves it bought a substantial property in the central business district of

Honolulu, purchased Ral im Properties in Australia, made a one-for-five share issue and entered into a tourist property venture with BI ue Meta I Industries.

In Australia in 1973-74 it was still all systems go without any apparent warning that by August 19, 1974 it would be all over.

Mainline had added a third institutional share-holding to its list - the MLC. Mainline took over the property owning company Ralim

Properties in which MLC had a 44 per cent interest. Most of the

Ral im shareholders took the cash offer but MLC took shares and so joined AMP and W R Carpenter in the 10 per cent c I ub. Both the

AMP Society and Carpenter increased their shareholding in Mainline

during 1974 (14).

W R Carpenter was the on I y one of them represented on the board

through Mr W R ( Randoph) Carpenter.

With these major shareholders, many people reasoned, how could

Mainline fail? But on his new course Dick Baker had sailed into a

mine with a delayed action fuse - the Collins West development. 29

Some of the major shareholders were prepared to help as Mainline sailed closer to receivership, but once they saw the enormity of the mine and the impossibility of removing it from the ship they jumped overboard and let their share investment sink.

Mainline made its first investment in Collins West in 1971 when it purchased the Sigma property at the Spencer Street end of Col Ii ns

Street for $4 mi 11 ion, payable $400,000 on deposit and the balance three years laterin 1974 (about two months after Mainline went into receivership). Mainline obtained the $400 ,,000 deposit from IAC.

Mainline came to the AMP Society and others in May-June of 1974 and admitted it was strapped for cash because it had to make a

$3.4 mi 11 ion payment to the Asmic group.

The AMP Society helped by buying three assets from Mainline - a property in Darwin, the Mainline portion of the head lease of IAC

House in Sydney and the partially completed Philips House development in North Sydney.

It had been negotiating the Darwin purchase months earlier but the other two were designed specifically to help out. It was also

planned that the MLC would buy some other properties.

The various short-term borrowings started to mature and there was

no money to meet them. Most of these short-term borrowings had

been fixed to the bank bi 11 interest rate and in the 1974 period the • • · 30

interest rate on these loans was up around 20 per cent which compounded the problem.

As the inevitable end neared, merchant bankers Hi 11 Samuel were called in to devise a recovery plan and they proposed that with the injection of $6½ million the company would be saved.

The AMP, the MLC, IAC and others took part in a weekend conference to look at the situation. It then became fully apparent just how much Mainline would lose on Collins West, which was probably worth between a quarter and a half of its book value of more than $16 million. The institutions decided not to put good money after bad and on the Monday Mainline went into receivership.

The general downturn in the property market in 1974 pushed

Mainline's shares down to $1.65 in March, but all other property companies were similarly affected. However, on 15 August 1974,

Mainline's shares fell to 40 cents, prompting an enquiry from the

Stock Exchange. On 19 August 1974 it was announced that the ANZ

Bank had appointed a receiver to Main Ii ne. It was estimated that

the corporation was facing a liquidity deficit of between A$50-60

mi I lion.

The receiver, Jim Jamison, came in and one of his first actions was

to try to save the construction business, which appeared to be

viable. 31

The essence of this arrangement was to hold on to major contracts unti I the receiver had a chance to resume work. However, most of the contracts had cl a uses in them saying that in the event of a

Main Ii ne receivership, the owner of a project had the right to rescind the contract. There was a time limit on the right of rescinding of the contract and most owners protected their position by rescinding while sti 11 being prepared to negotiate with the receiver.

Nevertheless, the fact that the contracts had been physical I y rescinded made negotiations very difficult and confidence was lost.

Sub-contractors were a problem because many would be sent bankrupt and would be unable to carry on unless they were paid the money owing to them by Mainline. Under the receivership there was no way they could be paid for back work because they were mere I y unsecured creditors.

The attempt to keep construct ion going failed. On 12 September 1974

Mainline ceased trading. In the early days of receivership, one of

the problems of Jim Jamison was to keep all the mortgages in touch

with what was happening. This was finally achieved by a team

phoning around.

In the end all the buildings and properties were put into a giant

auction and almost all sold at the sale or in the negotiations which

fol lowed. •• _. 32

The first mortgagees of developed properties were paid out. This was often very profitable to the first mortgagee as the money had sometimes been loaned on interest rates around 7 or 8 per cent, which was by then far below the rate at which it could be reinvested.

The receiver was able to sell Mainline's partly completed buildings.

The only properties which were not sold were development sites. The curse of Collins Street - Col Ii ns West - was handed back to the finance companies and sellers who foreclosed on their mortgages.

Mainline had several development sites in Darwin and only one was sold while the large development site in William Street, Sydney, was not sold.

The sale of the properties yielded the Mainline receiver a net $2 million to $3 million.

At the time of its demise, Mainline consisted of 41 subsidiaries

which in turn control led a further 23 subsidiaries. Some branches of

the corporation were quite efficient, but the very rapid spread into

diverse fields, and into various parts of Australia and other

countries, made effective management difficult.

Two weeks before Main I ine' s problems became pub I ic knowledge The

Australian Financial Review noted that Mainline's profit for the

first half year of 1974 was 2.1 per cent ahead of the previous six

months - or 25. 7 per cent ahead, 51 .8 per cent ahead, depending • • . ~ 3

on the accounting principles fol lowed. This raised one important point of contention about property companies and provided one explanation of how they were able to attract finance so easi I y. It centred on the way buildings and sites were valued, the relationship of these valuations to total assets, and the capitalisation of interest.

M E Nieman, an accountant who acted as a receiver for a number of fallen property companies, claimed that development companies were

'classic cases where it is easy to conceal the true facts [about :p•&i·Hon their financial]...,..,. There is I ittle doubt that on any reasonable definition some of the companies produced fake reports for some time prior to their apparent date of failure' (9).

A sense of timing and business acumen were of the essence in surviving a severe downturn in the property market such as occurred in 1974.

Geradus Jozef Dussel dorp, the founder of the Lend Lease

Corporation, announced in October 1971, just as the pace of office development was approaching its peak, that Lend Lease was turning

away from office developments to concentrate on shopping centres

and other avenues. 'The art is what not to be in', Dusseldorp

advised. 'The office property scene will be a buyers' market for

some time to come. Undoubtedly some operators wi 11 go broke •••

there is a worldwide over-supply of office buildings' (10). -34

5 CASE STUDY: HOME UNITS AUSTRALIA

The story of Home Units of Australia, builders who became substantial I an downers, was a classic i 11 ustration of the flamboyant manner of developers at the beginning of the 1970s.

Sidney King was a British migrant who arrived in Australia during the 1950s with only the legendary five pounds. By the mi d-1960s he was selling 600 home-units per year and then, in partnership with an accountant, George (Gary) Bogard, he developed Home Units of

Australia into a business with suggested assets of $45 million by

1972. In July 1973, CSR purchased a half interest in Home Units of

Australia for an undisclosed sum thought to be between $4 and $5 million. Within six months it was common knowledge that Home Units were in desperate trouble and before a further six months had passed it had collapsed.

As part of a rescue operation, King and Bogard sold their remaining half share of the business to a combine of Hooker and

the finance company IAC. At the time it was estimated that Home

Units of Australia had borrowed between $60 and $90 million to fund

its home-unit operations and its landholdings, which amounted to

some 300 sites scattered through 19 suburbs in Sydney, as well as

tourist land on the coast. King was described as 'ambitious,

ruthless, vain, wanting to be rich' and was said to follow 'a

jet-set style of life' (15), characteristics which fitted the public's •• --~ 35

preconceived image of the hard-driving developer. In 1977 it was reported that King and Bogard had obtained Monaco citizenship and had been living abroad for some time (16).

When the Home Units of Australia Group rescue operation was mounted by CSR Ltd plus Hooker Corporation Ltd and IAC Holdings

Ltd, CAGA (Commercial and General Acceptance Corporation) had loans totalling $24. 7 mi 11 ion outstanding to Home Un its.

CAGA entered into a deed of arrangement with the reconstructed group whereby it would take control of the properties over which its loans were secured. It completed a number of development projects underway at the time of the reconstruction and applied for and began development of others that were, at that stage, just in a rough land state.

As a resu It of this activity CAGA became one of the I ead i ng marketers of home units in Sydney and at December 31, 1976, still had about $28 million in outstandings lodged with old Home Units of

Australia developments.

"If we had known at the time that the property market would take

such a long time to recover in we would not have

made the decision we did in July 1974," Mr McBeath, CAGA General

Manager, said on 10 March 1977 ( 17). "The market continues to be

fairly depressed and we can't see it improving for some time. Now

we are clearing the decks. We ar_e having a massive cleanout so

that funds can be redirected to income earnings areas." :36

As a result of the foray into the property development field by

CAGA, CAGA's parent company, the Commercial Banking Company of

Sydney, on 10 March 1977 reported its worst ever loss in the amount of $11,338,000 for the six months to 31 December, 1976 (17). This loss stemmed from the $23 mi 11 ion provisional write-off by CAGA on properties principally previously owned by Home Units of Australia. 37

6 THE FALLOUT

Reverberations of the 1974 col I apse of the Sydney property market continued for several years thereafter.

In March 1977 Parkes Development, the company with the I argest land-holdings in Sydney, a developer on a massive scale, a builder of homes and constructor of some of Sydney's I argest office blocks, fell into provisional liquidation. The financial organisations which had fuel led the conflagration in prices and al lowed companies, large and smal I, to extend their operations on the slimmest of financial basis, then simply withdrew their support. Parkes in 1973 had consisted of 70 companies with assets of $100 million but, amid numerous problems, had undertaken a rationalisation program through 1975 and 1976. With a recession in the economy, however, there was insufficient demand to generate a cash-flow which would cover Parkes' interest bill of about $5 million per year.

The winding up of companies such as Parkes had consequences for

the finance houses. These latter inherited through mortgage or other

arrangements a vast bank of over-priced and under-sold land. The

situation for the finance companies themselves became precarious.

Some finance companies then engaged in a massive sell-off of

property which depressed the market further and so aggravated the

shaky position of the companies. One of the problems was the

capitalisation of development costs and interest charges, which in

boom times had been covered by the rising price of property. In a .. ~

depressed market, capitalisation helped create a substantial reduction in profit or an absolute loss.

In 1976-77 two large finance companies, CAGA and IAC, both major creditors of Parkes, were in trouble. In the three years to Apri I

1977, IAC had lost $56 million in accumulated provision and write-offs. Citicorp invested heavily to prop up IAC, which began a severe rationalisation program. Citicorp in April 1977 described the

Australian property market as being 'in a state of total col I apse' and set about divesting itself of the Parkes charges and its inherited stock of land. When Citicorps's pre-tax loss for 1977 was published, it stood at $51.5 million.

CAGA had an exposure to property of $257 mi 11 ion, and announced abnorma I provisions of $23 mi II ion against property acquired during the boom. Short I y after this was announced the share market was shaken by the news that the giant Hooker Corporation had a land stake worth more than $100 million, held in seven companies, each of which were 50 per cent owned by Hooker but which did not

appear on the Hooker balance sheet. Hooker's associations were

greater with IAC than with CAGA, but the announcement served to

demonstrate the general frailty of the property market. CAGA

survived only because of massive injections of funds by its parent

the major trading bank, the Commercial Banking Company of

Sydney. 39

On February 1977 another I arge finance company, ASL, reported a loss of $17.7 million of which $12 million were contributed by property write-offs. An sett Transport Industries had acquired a

46-per cent share of the finance company. An sett pumped almost $20 million into ASL, including $10 million in the last four months of the company's existence. Losses for 1978-79, however were more than

$18 mi 11 ion, and on 8 February 1979, ASL went into receivership with debts of abut $180 million.

In February 1976 the Finance Corporation of Australia, a subsidiary of the Bank of Adelaide, was found to need to make provision for­ write-offs of up to $30 million. Again the problems derived from the field of property developments. FCA went into receivership and its parent bank was rescued by amalgamation with the ANZ bank, at the request of the Reserve Bank. Operating losses of FCA for the 15 months to 30 September 1979 came to $42.67 mi 11 ion.

Other- finance companies, such as Beneficial Finance and Lenswor-th

Finance, also experienced severe difficulties at this time. •• 40

. . . ,. • ...... ,,,.. '':\d ,.. t -~. ··. [ r· ~~, B>iiiil • p t . I • I WHAT IT COSTS NOW fOR· RESIDENTIAL ~D' '. ..'.~-: ~,~ ' . ;, • j • . I ,;~\~:(_'.'.l';,1

. MEDIUM~ .... :_.: _;,f· . CAPITAL GOOD MODE#}¥~ . . . • . ~1'.!:li;:W-''t SYDNEY Frenchs Forest · Miranda . . . ,'_ :_ · . . Pennth .. 1.;,1(1,.~ (24 kms : (29 kms _ . ; .· .' (5Huns :.~~ ,1~ from city centre) :rromcitycentn:) > !-··· :'fronicitycen~r~ $18,000-$21,000, _ ·. $22,Q00-$2,.~ .· ...';"., · $9,000-$14,000 .•-J "': MELBOURNE . Glen Wav~rley : ·. · .. LaJoi: ' .. ·.. :j:-· ,- · Deer"Park--.}~'f( . (21 kms) ...• ;,,, .. • ' . {20 kms) ... is ·, · (20-kms) ..'"'fRI SilS,000-$20,000'>oJt;,;;,t, . $10,000-$12,000 · - ~ · ·$8,000-$10,000:i~· BRISBANE Bell~~ ~:llgi~;,:J$f ~ ·).Jegaster ic , Kallangur · l4 ~· ,(20 kms) :·1:•ili:'_1~1,i':;·i~, .. (17 k~) ~- · ·. (27 kms)<'.:Jt~~ $10,500! 1 t-.~.ll~!!: t-ir- • $8,500 .. $6,500, :::~~~ ADELAIDE Flagstaff Hill· 1 '< ; ~- Christie Downs.. ~,::_ · · Elizabeth W•'lf~~ ·c~~.~s) . ·---,~!,: : <:,:;s> :·.',:·: .-.. · t.::>:'.:~;t:. PERTH Balcatta· · . Parkwoqd ,./:,:" .' -J.daddingto1f·~~ (13 kms) ,:' (13 ;kms) -~ ··f... . · : ·· .(18 kms) · hHt\G' 8 500-$10 000 .. $7.. i:Mroooc,·. ':b •.--: .. : '$5 5nAr.:. ooof:;;!i:;: $ I t J-IV\riP~I 1, ~ . , , • • I ~J, • ') : HOBART Sandy Bay Howrah ··· :·· · - ·, :·. Glenorchy ~ [!.'f!· ~- . (3 kms) . (10 kms) . ·: · ; ' (9 kms) ':· 1 t·t $12,500-~20,000 · · $7,5,00-$14,500. . . · '$6f000-$9,000,i:,f~· CANBERRA Wanmassa · Kambah · · · R'1' 1 t..; (Leasehold) (15 kms) . (14 kms) · '· . ), . ... -'.;' $6,000-$8,000 $6,000-$8,000 . . / - .. /_10 _;~

SOURCE: Commonwealth B_ank: Quarterly H~U$ing Surveys, December. :,~·-· .. ~ .... '

· Table 6: Australian Resi dentia I Land Costs January 1976 from The National Times 3 Jan 1976 ... 41

7 THE ENSUING YEARS

The on-going fallout of continuing collapse of property companies in the years 1977 to 1979 resulted from the failure of the property market to quickly rebound after the collapse of 1974. Through 1974 sales of both land and houses continued to decline. There was a tenuous recovery in the market in 1975, but this faltered in the

June quarter of 1976.

Throughout 1977 the market was depressed, with the average price of land falling to $16,482 and the average price of a house falling to $35,139. Sales fell dramatically. In 1978 there was a revival in the market, with the average house price rising to $43,664. The basic reason for this revival in the market lay in pent-up demand.

By 1978 the excess of project homes which had been built in the outer areas and of home units built in the inner areas during the boom, had been used up. Between June 1975 and June 1979 Sydney's population increased by 5.1 per cent. This increased population in a period of reduced house building resulted in a general rise in rents. The vacancy factor on residential accommodation in Sydney declined to 1.4 per cent, compared with a normal level of 3.0 per cent. This demand for rental accommodation sparked a revival of home unit construction. This revival was helped by an improvement in the general economy in late 1977 and 1978. In February 1978 the

Fraser Government attained power. 42

The pressure of high rents soon increased demand in the general housing sector, and property values leapt upward during 1979.

Between June 1974 and June 1978 the wholesale price index for building materials had increased 61 per cent. During the same period average weekly earnings in New South Wales increased by 76 per cent. In the First six months of 1979 the average price of a house in Sydney rose to $52,194, an increase of 19.6 per cent compared to the prevailing inflation rate of 9.0 per cent. The size of the increase made it increasingly difficult for low-income earners to enter the market because of the size of the deposit gap which had bee created.

During the first half of 1981 there was another downturn in the general upward trend that had occurred in house prices since 1978.

Price began to level in January 1981. By June 1981 the median price of a house in Sydney was $71,550, a fall of almost 10 per cent since June 1980. The revival had halted. Table 1 shows the increase in average values of houses in Sydney in the year ending June

1976.

The effect of the boom of 1968-74 and the period of increasing

prices from 1978 to 1981 was to push residential property values in

Sydney to extremely high levels: the median price of a house in

Sydney in mid-1981 was 85 per cent higher than the median price of

a house in Melbourne. Home buyers, therefore, were not only

saddled with extremely high repayment charges because of the

interest-rate structure, but they had to face increasingly large

deposit gaps because the prices of homes were so high. •• 43

Table lncreaae In average value of houaea, June 1978 to June 1979

Sydney Local Govemment Areas

Average price Average price Local Government Area June quarter June quarter Increase 1978 1979 ($) ($) (%)

Leichhardt 34000 40800 20.0 Marrickville 30500 35000 14.8 Randwick 54000 64 600 19.6 South Sydney 24 900 32100 28.9 Sydney City 34 700 46100 32.9 Waverley 56700 69600 22.8 Woollahra 91 800 108 800 18.5 Ashfield 43700 50600 15.8 Burwood 47900 50900 6.3 Concord 41 200 52400 27.2 Drummoyne 48000 60500 26.0 Strathfield 57 800 • 63300 9.5 Bankstown 40400 45500 12.6 Botany 40300 48900 21.3 Canterbury 37800 46000 21.7 Hurstville 46600 54900 17.8 Rockdale 41100 51 800 26.0 Kogarah 51600 63300 22.7 Sutherland 50900 63300 24.4 Campbelltown 35900 39900 13.7 Liverpool 37100 41 600 12.1 Aubum 29200 35700 22.3 Baulkham Hills 55800 67200 20.4 Blacktown 31 900 36400 14.1 Blue Mountains 29400 30300 3.1 Fairfield 32300 37600 16.4 Holroyd 34100 40000 17.3 Parramatta 38200 42400 11.0 Penrith 33500 36000 7.5 Hornsby 52000 63000 17.3 Hunters Hill 80900 84300 4.2 Ku-ring-gal 79400 97200 22.4 Lane Cove 69800 n400 10.9 Manly 56600 n100 37.3 Mosman 85500 99000 15.8 North Sydney 59600 85000 42.7 Ryde 46000 56200 22.2 Warringah 57200 69300 21.2 Willoughby 63300 78300 23.7 Gosford 34300 39500 15.2 Wyong 26800 32900 22.8

Source: Australian Bureau of Statistic, Sahla of Housa In the Sydney, Newcastle and Wollan- (JOll{J Areas of New South Wahia._ ~ and Juqe ~m 1979 (Sydney: 1980)

Table 7: Increase in Average Value of Houses June 1978 to June 1979

From M T Dai y: Sydney Boom Sydney Bust p32 •• 44

Table 8: Building Approvals, Aug 1975 to Aug 1976 from The National Times •• 45

Table 9: House and dwelling approvals in Australia, 1973-1975 from The Australian 11 June 1976 •• 46

·'

150 _100

Table 10: Large Building Commencements in Australia 19' 73-1976 from the Australian Financial Review 2 July 1976 •• 4 7

40 years-

Table 11: Increase in Residential Land Values, Sydney, 1939-1979 from The Sydney Morning Herald 27 October 1979 •• 48

151 r .. t.

Table 12: Non-Dwel Ii ng Work Levels, NSW Bui I ding Industry 1968-1978 from the Australian Financial Review 24 June 1977 • • ','"4 9

The over a 11 effects of the property boom of the early 1970s and its collapse in 1974 included, for investors and property companies, a combined loss of between $1 .5 bi 11 ion and $2.0 bi 11 ion. The price of

Sydney real estate and the geographic spread of the city exceeded the means of authorities to control it. These effects were to have a

lasting impact on the city of Sydney. 50

8 COMPARISONS WITH THE PROPERTY MARKET IN 1989

As has been described, the cycle in the first half of the 1970s decade went I ike this: stockmarket boom and bust - col lapse of investment entrepreneurs property market boom Government induced credit squeeze property market bust col lapse of property development and finance companies. It would appear this cycle is being repeated.

In the late 1980s, a number of entrepreneurial companies and financiers have either gone into I iquidation, such as Rothwel Is and

Equiticorp, or have sustained huge losses, such as Ariadne

Australia.

In residential and commercial property, 1988 was one of the biggest years ever - far bigger than anything seen last decade as ex-stockmarket money was chased into property by speculative funds seeking tax havens through negative gearing in housing and unit trust development of office buildings.

And now both the ma in property markets are headed into uncharted

territory, and probably into big trouble. As politicians around the

I and are gradua 11 y noticing, there is a critical shortage of vacant

residential land - especially in Melbourne and Sydney.

There are obviously some important differences between now and the

early 1970s. In particular, while in most other respects we seem to

be at around early 1974 now, the present residential land situation 51

appeared four or five years earlier than that, although the big problems did not emerge until 1974.

A critical shortage of vacant outer-suburban I and appeared during the late 1960s and resulted in tremendous speculation that drove housing prices up beyond the reach of most Australians.

In 1971, governments released 27 years' supply of land and flooded the market. But because infrastructure and services were slow to catch up with that supply, speculation continued for several years and prices kept going up.

The promises of riches drew many developers, who borrowed funds from the pub I ic through long-term debentures and invested in vast holdings of broadacres. Meanwhile, there has been a paral let boom in commercial property developments, as the big developers anticipated a similar growth in office space needs.

The credit squeeze imposed by the Whitlam Government, as earlier described, resulted in the col I apse of the Sydney property market in

1974.

But the explosion in I and prices and in commercial space

availability is looking much greater now than it was then,

especially in Melbourne. •• 5.2

As for residential land prices, these are fuelling inflation and providing the base cause of tight monetary policy and high interest rates. The rises in prices of vacant land in the outer suburbs of

Melbourne and Sydney have been quite astonishing with some areas' prices quadrupling.

Already, there are signs of trouble in major property companies, such as Hooker Corporation and Chase Corporation, whose current exposure to the market is looking decidedly unhealthy.

Hooker Corporation shares plunged to a nine year low during July

1989, as it appointed a financial advisor at the urging of its major banker. The sharemarket performance of Hooker over the past five years is shown in the attached chart, taken from the Sydney

Morning Herald of 21 June 1989.

Another company teetering on the edge of provisional liquidation is

Chase Corporation, to which an insolvency expert from Peat Marwick

Hungerford has recent I y been appointed. Chase is understood to have defaulted on a $50 million loan payment due on 30 June 1989,

and other interest payments due (13).

Sales activity in the market has stalled with buyers offering fire

sale prices and vendors holding out in expectation that the fire

sales will not eventuate and that the investors will re-enter the

market as prices approaching those of I ast year. • • 53

Table 13: Recent share price movements of Hooker Corporation Limited from The Sydney Morning Herald 21 June 1989 54

It is a classic hiatus and most observers believe it will be several months before the direction becomes clear. Certainly the small number of investment sales that have taken place in the last month have been struck at yields similar to those struck in the heyday of

1988.

But the number of development site sales in recent months is neg Ii gible. Last year, by way of comparison, sales of development sites and buildings ear-marked for refurbishment accounted for a I most half the $4 bi 11 ion worth of property that changed hands in the Sydney CBD al one.

It is in that context that the coming sales, and selldowns, planned for Bond Corporation Ltd, Comrealty Ltd, Girvan Corporation Ltd and Chase Corporation gain such importance.

Bond had put the prime Chifley Square development site offici a 11 y out to tender with bids to close in October. The site, on which

Bond is spending about $8 mi 11 ion a month in construction alone is expected to bring in excess of $500 million if sold outright.

Comrealty has had several of its large sites on Sydney's South

Dowling Street out to tender without apparent success. Girvan has so far been unable to put a joint venture in pi ace for the Paddy's

Market site in Sydney nor a financial structure that wi 11 enable the

group's massive Chatswood development to be taken off balance

sheet. • • 5.

,J ~1 :- ~ --~ · DEVELOPERS;ANJD'i(i:@.l_ - l · · i: ~;4 . ,,,: ~ -, . . . ? '~ ! I I LENOLEASE 88100 12MTHS 117832 20.10 149596 37.75 .• 1322 2.21 8.64 2 2 HOOKER 88/00 12MTHS 71117 U2 7-4645 :13.~ . :: 1-455 • 83.82 :.·\4.89 4 JENNINGS 88100 121.miS ~147 36.72 42997 . "3.79 ; ., 710 · · 38.19 ; ·: 4.2.5 3 .... 29.53 4 S PENNANT HOLD 88100 12MTHS 20335 33.62 H372 45.23 : . , 69 -~4.71 20 LEDA 88/ai 12MTHS 16792 712.31 21667 • 47U6 : .·.;i; ,.: 96 rJc. · J7.49 5 . 'i . .,·i 6 3 WESTFIELD H 88/00 12MTHS 16068 35.26- . 18698 · . . 3.44 . . . ~ 340 9.34 4.74 7 46 MIRVAC 88/00 12MTHS 15799 rJc 31954 '. · rJc : ·; 1.0 ·' rJc -~." 11.ll 8 8 JOHN HOUANO 88/00 12MTHS 1lX33 "3.54 15935 57.88 J 1921 111.33 . '~; .. 1.41 9 7 COMREALTY 88/00 121,ffiiS 11534 21.58 19437 1.09 : . 'j 33 56.56 : . : Ii.OS 10 10 LEIGHTON 88/00 121,ffiiS 11125 65.67 . 2-4-487 35.89 ' ' r 1278 9.51: ',. 0.87

Table14: Australia's leading Developers and Contractors from AustralianBusiness 16 Nov 1988 p69 5,6

Chase Corp, which has a property development portfolio in Australia worth about $300 million, is looking at "all the options" for its portfolio including, it is understood, offering them to the market as one package.

Chase, which in the past year has sold over $150 mi 11 ion worth of property into the bull market, is now carrying a portfolio development sites in varying stages of development.

Currently, almost $4 billion of Australia's prime commercial real estate is on the market, with $1.5 billion of property for sale in

Sydney alone, including Bond Corporation's Chifley Square (11 ).

The managing director of Property and Building Advisory Services

Pty Ltd, Mr Paul Brenac, has said recently that he expected

Sydney's residential property market to remain depressed for another two years largely as a result of migration to country areas

and interstate.

Both Mr Brenac and Dr Frank Gelber of BIS Shrapnel are greed that

the next few years will be grim for Sydney's commercial market

with vacancy rates rising to at least 12 per cent by 1992 (12). ... 57

REFERENCES

1. M T Daly, Sydney Boom Sydney Bust George Allen and Unwin, 1982 p2

2. H H Guldberg, "Building and Land Prospects in the Next Decade: The Developer vol 5, 1967 p 68

3. The Australian 29 March 1974

4. M T Dai y op ci t p 3

5. ibid p 8

6. ibid t!>

7. The Australian Financial Review 31 October 1973

8. The Australian Financial Review 21 August 1974

9. M T Daly op cit p60

10. The Australian Stock Exchange Journal vol 1 ( 1972) p 129

11 • Australian Financial Review July 13, 1989

12. Australian Financial Review July 19, 1989

13. Australian Financial Review July 5, 1989

14. The National Times 19 January 1976

15. Australian Financial Review 2 Feb 1977

16. M T Daly op cit p106

17. Australian Financial Review 11 March 1977