The History of Property

A Historical Perspective of the Property Cycle - John Butler

The Bible omits to mention the effect the seven years of famine had on land prices in the Nile Delta but it doesn't take a genius to guess by year six there were some pretty spectacular bargains to be had. It is fundamental that land prices shadow the economic cycle and have done throughout history - the trick is to distinguish between the peaks and troughs inside a cycle and the cycle itself.

Asked to comment after the Wall Street crash of 1929 the American financier Pierpont Morgan observed, "The markets will continue to fluctuate". 70 odd years later despite apparent advances in the techniques of forecasting we are no nearer to smoothing out the bumps in the cycle. Some collapses have unavoidable causes for instance the bubonic plague, which ravaged Europe at the turn of the seventeenth century or the San Francisco earthquake of 1906. Others we can only look upon with incredulity like Tulipmania in sixteenth century Holland or the South Sea and Mississippi Bubbles.

To the shell-shocked survivors of the last property collapse it seems inconceivable that the signs of an overheating market will ever be ignored again but the booms and busts of history amply demonstrate that they will.

The development cycle in contrast to the land price cycle is a formidable and malevolent mutation of the beast. For a development cycle to emerge the primary requirement is for an industrialised rather than agrarian economy with its consequential urbanised community.

The English Industrial Revolution, the progenitor of industrialisation, began to gather momentum sometime around the mid-eighteenth century. The reasons why it took hold in England is still a question of debate amongst historians - certainly population growth, stimulated by medical advances, was one. The population of England and Wales grew from 6.7 million in 1761 to 9.2 million in 1801 to 20.1 million by 1861. It is the urbanisation of that population which triggers the development cycle. In 1760, 15% of the population dwelt in cities, by 1800 this had reached 30% (compared with 10% in France) and by 1851 more people lived in towns than the countryside.

J H Chapman has defined the characteristics of a pre-industrial city as being "administrative, judicial ecclesiastical in function... the city not so much a node of economic activity... as a political and social centre drawing tax revenues and rent from the rural population in return for government." The changeover point to an industrial society and the start of the long cycle of development must be when this ceases to be true and the countryside becomes dependent on the City for survival.

What is the development cycle? Of all the definitions coined the simple truth is probably encapsulated in the proposition which Simon Jenkins put forward in his penetrative 1992 BBC lecture "The Great Bankrupts", the development cycle starts and finishes when developers en masse go bankrupt until it happens again. Tracing the cycle in terms of our capital city is like watching the high tide mark of repetitive flooding.

As the drift from country to town accelerates so the cycle begins to emerge and take on its essentially speculative and self-fuelling characteristics. 100 acres of Mayfair was the dowry 12-year-old Mary Davies brought to her marriage to Sir Thomas Grosvenor. At the beginning of the eighteenth century her sons set about developing their inheritance laying the foundations of the London we know today. This burst of development activity described by a contemporary observer as being impossible to judge 'as to where and when they will make an end or stop of building' nevertheless ground to a halt in the early years of George II's reign not to rise again until the signing of the Peace of Paris in 1763 almost 30 years later. This boom would see the great Georgian estates of Portland, Harley Cavendish, Cadogan and, of course, Grosvenor embark on the mammoth undertaking of the Great Improvement which would continue almost uninterrupted until the Revolutionary and Napoleonic Wars.

The post-Waterloo euphoria would lead to the boom of the 1820s with all the characteristics which would become a familiar pattern as a development cycle peaks, share speculation, excessive borrowings and spiralling prices. This boom was ruptured by the stock market crisis of 1827, which in turn was triggered by the collapse in the price of cotton throwing both England and the USA into turmoil. Even the great Nash was almost swept away in the sea of bankrupt sub-developers and abandoned plans. Economic interdependence had already progressed to the point where Belgium, France and Germany were also absorbed into the malaise.

Britain, possibly because of its more advanced stage of industrial motion, climbed out of the pit of recession faster than others. By the late 1830s the developers were active once more on the back of a boom, which would become known as 'Railway Mania'. It must be remembered the railways had as great an impact on the nineteenth century as the microchip has had on ours. Unfortunately the financial basis of this massive expansion was a pyramid sales operation which ended abruptly in 1848 when George Hudson, the 'Railway King', fled the country.

The Great Exhibition of 1851, the brainchild of Prince Albert, helped re-invigorate the market. Almost 6 million visitors, equivalent to a third of the population, were to pass through its portals during its five months of operation, whilst adjacent Kensington was developed under the glare of this bright high noon of Empire. The panic of 1857 caused a blip as indeed did the Indian Cotton Crash of 1865, but like the slump of 1981-1983 there were peaks and troughs. It is the slowness of the property mechanism to react to short-term fluctuations that deludes the observer into believing in a completely false inherent stability in land.

In 1873 all this culminated in what has been described as 'the Crash of Crashes', which started in the States with railroad and gold speculation, which eventually engulfed both Britain and all Europe. This crash together with its aftershocks would create a deflationary slump, which lasted over 20 years. No crash of this century has equalled its ferocity in terms of human misery.

The eventual emergence from the Great Depression saw building activity at le fin de siècle at a greater pitch than at any time during that century. The Edwardian Indian summer, which followed, would die in the mud-choked battlefields of Europe.

The brief boom, which came with the cessation of hostilities, would be halted by the slump of 1921. Death duties and increased taxation to service the war debt took their toll many estates held by the same families for generations were now broken up. 1920 saw the greatest movement in land ownership since Henry VIII's dissolution of the monasteries. Whilst America, which emerged from the World War both as a major power and the world's leading creditor nation might 'roar', Britain was to languish on the dole. Consequently the effect of the Wall Street Crash of 1929 was less traumatic for England. Comparatively little speculative commercial development was undertaken in these hungry years. Perversely, London prospered. The new technogically based industries such as wireless and vacuum cleaner manufacturing together with do were all established in London's hinterland and whilst Britain had no comparable equities boom to the States, the City nevertheless did very nicely out of the European end of the trade. This would lead to London doubling in size in two short decades as Betjeman's Metro land enveloped the Home Counties.

The single most significant factor would be the expansion of electricity with the establishment of the national grid. In property terms the greatest beneficiary was London and the Southeast. The electrical power industry was consolidated under one roof, the Central Electricity Board, in 1926, which, armed with statutory and monopolistic powers set about establishing the grid. The success, of what was one of the most advanced electricity systems in the world, can be judged by its rate of domestic connection. In 1920 only one house in seventeen had electricity, by 1930 it was one house in three and by 1939 two out of three.

Its impact on the location of industry and, in particular the new light industry was enormous. Now they could site near their markets. London's Arterial approach roads begun to bristle with the new industrial schemes producing a vast variety of consumer durables. The Hoover factory on the Western Avenue with its elaborate Odeon facade, has survived as one of the last reminders of this period. The other great success of the thirties were the car, aircraft and Chemical sectors. The car and aircraft industries applying American production line techniques concentrated in the southeast and midlands. The chemical sector was more geographically diverse but it in this sector one begun to see the emergence of trend which would come to dominate economic life in the post war years - the birth of what eventually would become the multinational. Since the turn of the century industrial combines had been slowly coming together absorbing and rationalizing smaller companies to form conglomerates Imperial Chemical Industries (ICI) and Courtauld being two prime examples. They would bring in their wake a change of employment and work patterns and here property usage which would have far reaching consequences over the next 50 years.

The effect on London and its environs of this period of sustained growth was enormous. In two short decades the tide of London's expansion washed over the Home Counties surrounding, submerging village, hamlet and market town alike. In 1918 the journey from Sutton to Croydon lay across heath and farmland by 1930 all this had gone to be replaced by mile up on mile of mock Tudor residential interspersed with Road Houses and the neighbourhood shopping parade serving this new suburban market. The new industry bought new local employment opportunities, which perversely were the beginnings of the decentralisation concept, which would dominate so much of post war thinking. The common perception of the thirties as the 'Devil’s Decade’s not only partially untrue but it also masks a shift in the UK's industrial base which would be the foundation of the post-war economic pattern and the beginnings of the 'Affluent Society'.

This would also be an important period for retailing as the multiple begun to take hold of the High Street. The first multiple had started almost a century earlier, one Mr. W. H. Smith, had seen the potential of railway stations as sales locations and equally the train as distributor. Sainsbury's had been founded in The Cut near Waterloo in 1868.

The nightmarish visions of total devastation depicted in H G Wells' "The Shape of Things to Come", no doubt contributed to the immediate collapse of property at the outbreak of the Second World War. The post war story most will know well - the throttling of any revitalisation by the 1947 Act then the lifting of building controls in 1954 which ignited a boom which with the usual peaks and troughs, (Betterment Levy, the oil crisis, Office Development Permits) was to last until the dramatic collapse of the secondary banking sector in 1973. A crash, which came within a hair's breadth of shattering the entire British banking system.

14 years later the financial revolution of the Reagan/Thatcher years would end on Black Monday, 19th October 1987. As with practically every other collapse in recorded history the truth took a long time to dawn on its leading players. Chancellor Lawson described it as the biggest non-event of the year - at the end of 1987 the Treasury was still forecasting 6% growth. But the cycle had ended. Slowly but inevitably the property market followed with tumbling prices and the development market's main movers of the '80s, almost without exception, followed each other into bankruptcy or as near to it as makes no difference.

What conclusions can one draw from this endless cycle of boom and bust? Is it possible to avoid or at least minimise its impact? Property collapses follow slowly but inextricably the end of an economic cycle. Only occasionally is property itself the principle vehicle upon which the proceeding boom is based. This was the case in 1973 when the loose monetary policies intended by the Heath government to boost export orientated manufacturing industries fed instead into an ever-spiralling commercial property market. But be it tulips, houses, railways, equities or gold the end result is always the same. Property will boom in the good times and collapse thereafter. Loose money will always be attracted to property - it is in essence simple to understand, readily accessible at almost every level and to every type of person. Indeed part of the decline of British industry is possibly attributable to the fact that bankers more readily understand, and, are comfortable with, property than with the manufacture of widgets.

In 1994 the Royal Institution of Chartered Surveyors published a joint paper, which analyzed the various stages of the cycle research as A J P Taylor's lectures on 'How Wars Start' so clearly demonstrated it is one thing to understand the process it is entirely another to prevent it reoccurring. In his introduction the then president Clive Lewis stated that this would be a "starting point for debate on how the property cycle might better be managed." Sadly, I am doubtful whether this will be the case.

Galbraith believed that the inevitability of the economic cycle had to do primarily with the memory of man, the first generation to experience it, their children to be warned by it and their grandchildren to forget the lesson. Every generation will give reason why this boom, unlike the others, is sustainable and then in the aftermath why this collapse was different. The interdependence of the world's markets makes further crashes inevitable. Indeed technology seems to undermine rather than improve the situation. Witness the automatic computerised selling of shares on Black Monday - a programme to protect merely exacerbated. The cycle will continue and indeed worsen.

Developers like politicians are both optimists and gamblers - few ever quit whilst they are ahead. Sir Richard Rogers in this year's [1995] Reith lectures pointed out that global urbanisation was growing at a rate equivalent to the creation of a new London every month. Under these pressures it's unnerving to observe the vulnerability of the system. The problem is as Emerson once dryly observed, "we only learn geology the day after the earthquake."

Sources

Granter, Neil, Population since the Industrial Revolution, Croon Helm 1973
May, Trevor, An Economic and Social History of Britain 1760-1970, Longman 1987
Beckman, Robert, Crashes, Why they happen, what to do, Sidwick & Jackson 1988
Jenkins, Simon, The Great Bankrupts, BBC Lecture 1992
O'Morgan, Kenneth, (Editor) The Oxford Illustrated History of Britain, OUP 1984
Chapman, J H, The Economic History of Great Britain, OUP 1926
Barker, Felix & Peter Jackson, London 2000 years of a City and its People, Cassell & Company Limited 1974
Stevenson, John and Chris Cook, Britain in the Depression - Society and Politics 1929-39 2nd Edition 1994 Longman
The Times - various
The Estates Gazette - various