The Melbourne land boom of the 1880s was an economic boom that occurred in Melbourne, Victoria, Australia. It culminated in a speculative bubble during the years 1885 to 1889. Although now primarily associated with land and property, there was a concurrent stock market boom, accompanied by numerous company floats, many of a highly speculative nature. Following the Baring crisis of late 1890, British funding became constrained. There was a market crash, followed by the financial failures of numerous individuals, companies, and banks, which culminated in the banking crisis of 1893 and various scandals over unethical behaviour, mismanagement, and fraud. Australia plunged into an economic depression that was most severe and longest-lasting in Victoria, which took around 15 years to recover economically.
The Boom
Origins The cumulative effect of the gold rush upon the Victorian colonial economy, and a rapidly growing population of Greater Melbourne—it grew by 70% between 1881 and 1891—created a strong underlying demand for housing and commercial development in Melbourne. In the late 1880s, a speculative bubble occurred, now known as the land boom.
The beginning of the land boom is generally attributed to the Victorian colonial government's securing large loans from Britain, for 'reproductive public works', mainly railways and irrigation works. Employment in Victoria boomed. During the 1880s, government and private loans from Britain would total around £50 million.
New railway and cable tramway lines were constructed, as were new roads and new bridges across the Yarra River. These developments increased the demand for suburban land. A vision of Melbourne as a metropolis took hold, captured in the phrase, 'Marvellous Melbourne', said to have been first used by a British journalist, George Augustus Sala, when he visited in 1885. That vision also fed demand for commercial properties in the city itself. Political connections
Politicians In 19th century Australian colonies, it was quite usual to find prominent businessmen—and they were all men—sitting in colonial parliaments. Parliamentarians in Victoria had only received payment for their duties, initially to compensate for their expenses, since 1870, and a separate income was necessary. Legislation to pay members for their services, and refusal of the Legislative Council to pass it, led to a crisis known as Black Wednesday, in 1878.
Representatives from working class or organised labour backgrounds were still unusual. The 1890s saw the beginnings of working class political activity, but most parliamentarians of the time favoured laissez-faire policies. The main issue in contention was the choice of economic policy, between protection and free trade. The preponderance of businessmen was significant, given the role that parliaments of the time had in passing acts that changed the articles of association of financial sector companies, making or amending company law, or in authorising the building of railways, tramways or other infrastructure which could affect land valuations.
What is now known as a conflict of interest, seems not to have been considered an obstacle to political office. Some major figures in the land boom were also members of Parliament in Victoria.
Thomas Bent was elected to the Victorian Legislative Assembly for the district of Brighton, in 1871. He was Commissioner for Works and Railways in from 1881 to 1883, and used this position to extend the railway line from Caulfield to Cheltenham, thereby increasing the value of his own property developments. He was defeated at the election in September 1894. Later, he would be re-elected and become Premier of Victoria.
Matthew Henry Davies represented St Kilda in the Victorian Legislative Assembly from 1883 to 1889. He was a member of the Royal Commission on Transfer of Land and Titles to Land, in 1885, and, in 1887, was chairman of the Royal Commission on Banking. He was Speaker from 1890, until his resignation in April 1892. His elder brother, John Mark Davies, was a member of the Victorian Legislative Council from 1889 to 1919, and was Minister for Justice, when the Voluntary Liquidation Act was drafted and enacted.
Benjamin Fink was one of the two members representing the electorate of Maryborough and Talbot in the Victorian Legislative Assembly, from 1 February 1883 until 1 March 1889.
Charles Henry James represented Southern Province in the Victorian Legislative Council, from 1887 to 1890.
Andrew Lyell, later an early manager and director of Mercantile Finance, represented the electorate of Emerald Hill, in the Victorian Legislative Assembly, from 1877 to 1880. Unusually for a participant in the land boom, he left politics before the boom.
James Mirams was elected to the Victorian Legislative Assembly as the member for Collingwood in 1876, serving until 1886. He was subsequently the member for Williamstown from 1887 to 1889.
James Munro was elected to the Victorian Legislative Assembly, as one of two members for North Melbourne, in 1874. In 1877. He was elected for the new seat of Carlton, then for North Melbourne again in 1881, where he was defeated in 1883. In 1886, he was elected as one of the three members for Geelong, retaining his seat until he resigned in 1892. Munro was Premier of Victoria, from November 1890 until February 1892.
Royal Commission on Banking (1887) In 1887, the Victorian Government held a Royal Commission into banking. It was chaired by Matthew Davies. The findings were influenced by the evidence of the banker, Edmund Samuel Parkes (1834-1887), who favoured laisez-faire policies. Parkes advocated removing restrictions on what security a bank could accept, but more frequent disclosures of their balance sheet. However, Parkes also recommended various means to protect banks and other financial institutions, from runs and other financial risks, which were not adopted. As an example, the commission recommended that banknotes issued by a bank should be a first charge on a bank's assets, in the event of a liquidation, but did not accept Parkes's position that a bank should set aside a sum of money used to guarantee its issued banknotes. The commission also considered a restriction on lending against the security of land to be unnecessary.
According to one report, critical of its outcomes, "The one object of this commission was to relieve all banks doing business in Victoria, whether chartered, incorporated by local act, or trading under the Companies' Act, of any prohibition from advancing money directly on mortgage. Without a special Act, any bank doing loan and mortgage business directly, instead of as collateral security, could not have obtained the use of trust moneys, for trustees were not empowered to lodge trust funds in any institution not recognised as a bank within the ordinary meaning of the term. The result of this alteration of banking law had the immediate effect of enormously increasing the advances on real estate."
Early years (1880 - 1887)
Charles Henry James (1848–1898) is regarded as the first 'land boomer'. James and his brother-in-law, Percy Dobson, as partners, began to buy, subdivide and sell suburban real estate, around the end of the 1870s.
James opened the first tramway in Melbourne, in 1884. It was a horse tram and ran for two miles north along Station Street, Fairfield, linking Fairfield railway station to an otherwise inaccessible new sub-division. The land sold for good prices, and the tramway was short-lived. James had already sold around £3,000,000 worth of land, mainly in the northern and north-eastern suburbs of Melbourne, by 1887. The techniques that James applied were adopted by James's solicitor, Matthew Davies.
Around 1885, the established trading banks already had large exposures to loans secured by land. Those banks began to tighten credit, which should have cooled rising land values. Initially the value of land sales fell, from a total value of around £12 million, in 1885, to around £2¼ million in 1886 However, other changes soon brought about a resumption of the boom in land prices.
The outcome of the Royal Commission on Banking, in 1887, was to increase the available pool of funds for mortgage loans and loosen restrictions on lenders.
Other entities known as building societies and 'land banks' were established, with the specific aim of lending for land purchases, or even directly investing in land and other properties. Banking laws were lax, with low barriers to entry and little regulation of banks' operations, facilitating the proliferation and growth of these new financial entities. The building societies and 'land banks' also offered attractive interest rates to depositors, and their depositors' funds fuelled increased lending. Significantly, most of the new land banks were closely connected to or effectively controlled by people who were heavily involved in land speculation, although most such institutions raised funds from investors and the public through the issue of shares.
The boom conditions were also accompanied by a rising share market, initially driven by mining stocks, which provided highly favourable conditions for company floats and capital raising. Moreover, the concept of a limited liability company was itself a relatively new one in Victoria—stemming from the gold mining companies of the 1850s—and the laws around such companies were immature and hence open to abuse.
Novice investors did not necessarily associate the high returns being seen, with a high risk of a loss. Seeing others becoming wealthy, seeming overnight, as land and property values and share prices climbed, many people joined the rush. The speculative bubble inflates (1888) Around 1887, the penultimate and most frenzied phase of the land boom began. It was exacerbated by the buoyant economy, booming stock market, the huge volume of funds brought into Victoria, in the form of British loans and investments, and the new land banks' lending practices.
Land speculation In late 1888, the boom was being labelled "The Melbourne Land Boom", and remarkable increases in land values were reported. Land was being bought as a speculative investment, rather than for a buyer's own dwelling.
One land broker, in early August 1888, had made this bold claim, in a newspaper advertisement,"The marvellous Exchange of Freeholds, with the wonderful profits made thereon, have of late been startling in tho extreme. Fortunes have been made in a day, and are still being made, hence the question arises through commercial circles. when will the maximum be reached? The answer is comprised in two short words — NOT YET.
William Baillieu and his business partner Donald Munro, son of James Munro, opened a real estate agency and auctioneers business, Munro & Baillieu. It quickly became the largest real estate agency in Melbourne. The business made £168,000 profit, in the twelve months to October 1888. Much of that profit they invested in outer-suburban land and partly-paid shares in land companies, along with £100,000 that they borrowed and used to buy land.
The stock market By the 1880s, the amount of gold produced in Victoria was actually in decline, but new mining ventures were listed, notably BHP with its Broken Hill silver-lead mine, in 1885. The stock market again began to boom. BHP shares rose from £9 in 1885 to £176 at Christmas 1887, then £223 in January 1888. On one day, 20 January 1888, around £2-million worth of shares, mainly BHP, changed hands.