The 1974 Collapse of the Property Market in Sydney
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35.242G GRADUATE PROJECT THE 1974 COLLAPSE OF THE PROPERTY MARKET IN SYDNEY 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.