Share Facebook

Twitter

Whatsapp

Mail

Whatsapp Panoramic view of Fitzroy, Melbourne, in 1899

Housing bubbles have a tendency to burst—look no further than the experiences of Ireland, Spain and the United States in recent years—and the aftermath can be serious; the US collapse plunged the world into economic crisis. So is there a house price bubble in Australia’s capital cities? Stan Correy takes a look at the lessons from history.

If you’re writing about bubbles these days, it’s almost compulsory to have at least one quote from Charles Mackay's 1840 classic, Extraordinary Popular Delusions and the Madness of Crowds. When you read his descriptions of the Dutch tulip market and the South Sea Bubble, it’s natural to ask how people could be so gullible.

Of course, not long after he published his book, Mackay become a speculative investor in one of the greatest bubbles of the 19th century, the Railway Mania of the 1840s. Mackay, a free market and new technology enthusiast, thought things would be different this time.

[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment.

As policy makers today try to calm bubble hysteria, supporters of more investment in property and infrastructure also assure us ‘this time it will be different’. After all, we’re not investing in tulips or collateralised debt obligations (the infamous debt fuelled CDOS that were at the heart of the GFC). This time we’re investing in bricks, mortar and roads.

That’s exactly what Charles Mackay thought about railways, says University of Minnesota mathematics professor Andrew Odlyzko: ‘All those rails were getting laid down, the embankments were being built, something of real utility to society was being constructed.’

Mackay may have been fooled by an earlier, smaller railway boom of the 1830s, which didn’t crash. This one did, though, and many families lost everything.

Roads, railways, tramways and new construction technology were also at the heart of Australia’s most damaging housing and property bubble. The Melbourne Land Boom crashed in the early 1890s, ruining political reputations, incomes and lives. It also caused a depression that rippled through all the Australian colonies.

Share Facebook

Twitter

Whatsapp

Mail

Whatsapp Moreland Road, The Land of Promise, West Brunswick, close to Essendon, 1888

Melbourne real estate in the 1880s was, as the sales poster for Moreland Road, West Brunswick proclaimed, ‘The Land of Promise’. The fine print is worthy of any property supplement today: ‘A paradise in miniature, verily, verily ... Eden resuscitated.’

Australian historian Michael Cannon documented the excesses of the Melbourne Land Boom in his classic 1960s book The Land Boomers. ‘It seemed that people in Melbourne all went mad,' he says.

In a fascinating 1887 article, The Melbourne Argus called it the ‘earth hunger’. ‘[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment,’ wrote the paper.

Another newspaper report noted that leading auctioneers were 'confident that the present activity will be maintained and the values in all the new suburbs will continue to rise'.

According to Cannon, the people of Victoria financed their hunger for land by borrowing ‘huge amounts from the bank and from the various banks of the time, and even worse than that, the banks were willing to lend them money without almost no security’.

The land boom of the 1880s was much crazier than today, with Victoria's political elite heavily involved in inflating the bubble. Leading the craze were institutions called land banks, often owned and promoted by serving Victorian politicians. One of them was future PM Alfred Deakin who, according to Cannon, was so ashamed of his activities that he 'prayed in his diaries for forgiveness'.

What eventually popped the Melbourne bubble was a financial crisis—not in Australia, but in Argentina. English bank Barings was exposed to bad debt in Argentina and the crisis spread back to the city of London, which made it much more difficult for Australian governments and banks to borrow in Britain, driving interest rates up.

In April 1893 the Commercial Bank of Australia, which had lent money to a whole host of building societies involved in property speculation, closed its doors and went into bankruptcy. The boom was over.

Good Cheer, a North Fitzroy street balladeer, composed a song called ‘Marvellous Melbourne’, an ironic dig at the boom times of the 1880s. The first verse got straight to the point:

‘Will Melbourne never prosper again?

Houses are vacant in every street,

Hundreds are starving, daily we meet,

Houseless and homeless, no shelter nigh,

All hope has vanished—soon they must die.’

The boom of the 1880s has rarely been mentioned in the recent bubble hysteria. That’s surprising, because if you check the newspapers of the time, you can find articles that anticipate, almost word-for-word, stories that we read today about our 'potential bubble'.

Every bubble is different, and it would be wrong to claim with any certainty that what happened in the 1880s will repeat itself in Melbourne and Sydney today. Economic policy makers like the Reserve Bank of Australia, however, always do pay attention to past bubbles, and study them for clues on how to manage 'irrational exuberance'.

Share Facebook

Twitter

Whatsapp

Mail

Whatsapp A 1948 aerial photograph of a new housing area now known as Heidelberg.

The current head of economic research at the RBA, Dr John Simon, used the 1880s bubble as a case study in a paper he gave in 2003 at a RBA conference on asset bubbles and monetary policy. At that time, the RBA thought a housing bubble was building in Sydney and Melbourne.

At that time, according to economist Nigel Stapledown, author of one of the most comprehensive studies of Australian house prices, ‘we had a narrow escape’. Though rents were declining and house prices were under downward pressure, the resources boom propped up the market.

A bubble can form and disappear quickly, but it can take decades for the economy to pick up afterwards. Melbourne housing prices didn’t recover until well after World War I. The memory of past bubbles can significantly affect how we interpret and deal with potential bubbles today.

So how do you spot one? Well, when people say ‘this time it will be different’, it’s definitely a bubble.

How to spot a bubble Listen to this episode of Rear Vision as it examines bubbles that actually burst: the South Sea Bubble, Railway Mania and the Melbourne Land Boom in the 1880s.

Rear Vision puts contemporary events in their historical context, answering the question, ‘How did it come to this?’



