Boom and bust cycles in securities markets are very familiar and usually ridiculed in retrospect. It is easier to blame the victims of speculative episodes in ‘paper assets’ like stocks and bonds than those ensnared in contracting markets for ‘real property’ like real estate. Crises in real estate markets trouble the minds of observers far more. Perhaps the pride, dignity, and prestige traditionally associated with owning real property contrasts too sharply with the shame, indignity, and notoriety of financial folly. Indeed, while real property may seem like a safe investment, where it has been the site of speculation, as in the city of Melbourne in the late 19th century, the results are among the most severe any financial crisis can produce.
In the 1880s, the Australian economy was benefiting from growing British investment in the country, then just a collection of British colonies. Annual investment in Australia from the United Kingdom grew from £5.7 million in 1881 to £22.8 million in 1888 by which point this inflow summed to more than 11% of Australian GDP. As it grew, the form this investment took also changed; what started primarily as investment in securities came to include substantial investment in real estate as well.
Australian banks courted British depositors. Between 1880 and 1888, banks doubled their local deposits but quadrupled their foreign deposits, mostly from British savers. By 1889, 27.1% of deposits in Australian banks came from overseas investors. The new deposits funded lending and the ratio of credit to GDP rose sharply. Bank advances as a proportion of Australian GDP rose from 34% to 74% between 1880 and 1892.
This credit had to be used somewhere and much of it found its way to land speculation. The value of urban land was surging. In Melbourne, the capital of the colony of Victoria, there was growing appetite for suburban properties and prices were rising. People were looking to leave the dense city center, sending suburban land values higher; prices tripled or even more than quadrupled in some of Melbourne’s suburbs in the mid-to-late 1880s. Even in the central business district of the city, prices were doubling in the span of a few months.
The Associated Banks of Victoria, a syndicate of ten banks in the colony, cut interest rates from 6% to 5% in January 1887 and then to 4% that August. Lower interest rates encouraged investment in riskier assets.
In Melbourne, larger property companies were founded to marshal capital, both by issuing shares and borrowing, to purchase large tracts of suburban land and subdivide them into lots which they developed themselves or sold on to others. Forty such companies were founded in Victoria in 1887 alone. Also, building societies which previously provided financing to individuals buying homes shifted to serving these larger clients and speculators flipping properties. The building societies encouraged flipping by eliminating prepayment penalties, making their loans more appealing for shorter-term uses.
While somewhat more conservative than the building societies, the traditional banks were also tied to the direction of the property market. Restrictions on bank lending secured by real estate in Victoria were removed in 1888 after a recommendation to that effect made by the Royal Commission on Banking Laws a year prior. Rather than deter the government, the land boom underway seems to have encouraged the deregulation since it now seemed that land was a sufficiently marketable investment to be lent against. The resulting boom in property and finance was more pronounced in Melbourne than in other Australian cities.
In a lax regulatory environment, shadow banks commonly called ‘land-boom companies’ were formed to raise even more capital for real estate investment and speculation. At least thirty members of Victoria’s legislature were directors in these companies. In the span of just two years or so, the structure of the property market in Victoria was transformed in a manner designed to accelerate the mania.
Now, Melbourne properties would sell several times a year at generally rising prices with no improvements made between sales. Either in physical real estate or in the shares of real estate companies, investments in land had never been so available and appealing. Land sale advertisements took up four pages in one Melbourne newspaper. Annual return on land investments was 40% during the 1880s as the average price per acre rose from £39 in 1882 to £166 in 1885 and £303 in 1888. In comparison to land, finished construction saw a far more muted appreciation; the average home value ‘merely’ doubled between 1871 and 1889, perhaps hinting at the unsustainability of the boom.
The frequency of transactions grew outside the real estate markets as well. The number of transactions on the Stock Exchange of Melbourne tripled in 1888 and this was just one of six stock exchanges active in the city. The value of a seat on that exchange rose from £300 to £1500 in the three months between December 1887 and March 1888, which corresponded to the peak of the boom.
There were plenty of reasons to be optimistic about ‘Marvellous Melbourne’, as the city was billed. Melbourne’s population doubled in a decade, reaching half a million, a size larger than most European capitals and this in a fairly new Southern Hemisphere country.
In the city center, twelve story high rises rivaled their counterparts in London, New York, and Chicago. Lavish banks, hotels, and coffee houses opened in the city, where buildings were artfully adorned with decorative cast iron balconies. A new tram line opened in 1885, connecting a suburb which, like many others, offered an appealing life in single unit dwellings far removed from the less comfortable density of the city-center. However, Melbourne was about to experience an uncomfortable hiccup to its marvellous ascent.
The Associated Banks of Victoria raised interest rates 1% in October 1888, reversing their 1887 cuts. By now the boom had petered out. The traditional banks became more selective in advancing funds against the securities of the ‘land-boom companies’. Amidst this tightening credit, ten smaller property companies failed almost immediately. The shares of even the largest land-boom companies halved between 1888 and 1889.
Credit no longer as available as it once had been, debtors were forced to sell properties to repay their obligations. The average price per acre of Melbourne land, once at £303, fell back to £154. Though their advance was not as great as the appreciation in raw land values, the average home value fell 56.5% from peak levels. As the general economy weakened, one-in-ten houses were repossessed, and the number of vacant homes in Melbourne rose to over 12,000. Signs of crisis were sprouting up elsewhere too. Besides the Stock Exchange of Melbourne, all the rest of city’s stock exchanges closed, and Melbourne’s population fell by 50,000 between 1891 and 1893.
One suburb of Melbourne, Kew, lost perhaps 1,000 residents. A ‘Municipal Directory’ published annually in the 1890s reported that the value of all land in Kew fell from £137,274 in 1893 to just £77,333 in 1897-98, a 43% decline. Rents in the suburb fell by perhaps 20-30% as well. Residents of Kew declaring bankruptcy during the lean years were not only the suburb’s estate agents, builders, and carpenters in work tied to the fate of the property market but also a bootmaker, a surgeon, a distiller, and many others.
Better conditions elsewhere in Australia, an abundant harvest, strong demand for Australian wool abroad, and a boom in silver mining mitigated the broader damage to Australia’s economy, at least briefly. Eventually commodity prices fell. Also, British investment in the Australian colonies was falling in the wake of the ‘Barings Crisis’ of 1890 which reduced appetite for foreign investments. In 1891, credit tightened further, as banks demanded repayment of overdrafts.
Forty land-boom companies and building societies in Melbourne and Sydney had failed by March 1892. Depositors recovered most of their money but about one-eighth was lost and even the amount recovered lingered uncertain for a long time. The Melbourne newspapers published growing lists of ‘New Insolvents’.
Some of the traditional banks themselves also failed. The Commercial Bank of Australia, the largest bank in Victoria, shut its doors on April 5, 1893. It was not the first bank to close but it was the most consequential failure. By May, fifteen of the twenty-eight banks in Australia had either closed or suspended withdrawals, most of these in the span of just a few weeks. Bank assets fell by 25% between 1892 and 1899. The supply of money and credit, abundant in the 1880s, became even scarcer and an Australian depression more severe than that of the 1930s set in.
Each of the banks that merely suspended operations rather than close permanently reopened within a few months after raising more equity capital from shareholders. Recent changes to bankruptcy laws had favored restructurings over liquidation, reducing the chance that individual bank failures could spark sales of assets that could sink other banks. Still, the recapitalized banks had lost the confidence of British investors who redeemed their term deposits upon maturity. The net balance of Australian banks in London fell from a liability of £24 million to a small net credit of £200,000 between 1892 and 1899.
During the Depression of the 1890s, living standards fell as Australian nominal GDP dropped by one-third. Higher commodity prices, renewed immigration, and rising government spending would eventually break the string of bad years. Still, Australian GDP would not recover to levels seen at the height of the boom for another nine years after the trough. It would take fifteen years in the case of Victoria. In the property market of Marvellous Melbourne, house values would not hit their own trough until 1903 and would not recover to their previous heights until 1917.
Marvellous Melbourne may have seemed like the southern jewel in the British Empire. It was already a large and rich city, and it was getting larger and richer, attracting immigrants from abroad and housing them in spacious suburban homes far removed from the squalor associated with cities elsewhere, even those in other rich countries. It might seem that an investment in Melbourne land would be among the most worthwhile in the world. Why stop there though? Many saw the chance to obtain greater riches by buying land on borrowed money from eager lenders. When the market turns, it is usually the most alluring and exciting investments that fall the most, however safe one previously thought they were.
More from the Tontine Coffee-House
1. Frost, Andrew. “Kew in the 1890s Depression.” Kew Historical Society – Historical Periods Series.
2. “Marvellous Melbourne.” Melborne Museum, Museums Victoria.
3. Merrett, David Tolmie. “The Australian Bank Crashes of the 1890s Revisited.” Business History Review, vol. 87, no. 3, 2013, pp. 407–429.
4. Quinn, William, and John D. Turner. “Chapter 5 – Other People’s Money: The Australian Land Boom.” Boom and Bust a Global History of Financial Bubbles, Cambridge University Press, Cambridge, 2020, pp. 77–97.