The hidden financial crisis
Nicholas Davenport
In his brilliant essay on Socialism Now,' which should be made compulsory reading for the militant Marxists of the Labour coalition, Mr Anthony Crosland, now Minister of the Environment, wrote: "If I were asked my. priority for a short Bill to be passed on the first day of the next Labour government, I would choose a savagely penal Bill to curb the Odious depredations of commercial property developers." This was written in The autumn of 1973 When Mr Crosland was still in Opposition and unaware of his coming rise to power. It was a Powerful and tendentious phrase Which has been quoted,to justify the attack on property developers -not to mention the reclaimers of slag heaps — which in my Opinion has now been overdone. As Sir John Foster brought home to readers of The Spectator last week, a dangerous situation is developing in the City because between £3,000 and £4,000 million of bank and institutional money, loaned on the development of Property, is now completely frozen.
Let us get this business of Property development straight. There is nothing improper in it; it is an essential part of our economic growth. There is nothing speculative in it when life assurance money is used to finance the construction of great Office blocks in the City where the Shortage of office space has forced rentals per square foot to heights not seen even in New York. The Speculation comes when land in the suburbs and provinces is developed for shops and flats ahead of immediate demand. The social abuse comes when inordinately high profits are made, When horrible architectural designs spoil the landscape, when Planning permissions have been obtained through influence or corruption.
Yet none of this would have been possible if the Tory government had not made the egregious mistake of restoring freedom to moneylenders in the fatuous CCC green paper (Competition and Credit Control) of September 1971. With no ceiling or quality control bank advances poured out not only to the established property companies but to new 'secondary banks,' the mushroom finance houses, which promoted lucrative company mergers and take-overs
on the Stock Exchange and lent money to house-builders and speculators in residential property. the Investor's Chronicle published an excellent exposure of this scandal (by Michael Brett) in its issue of May 3. I quote the following: "From 1971 almost to the end of 1973 Britain went property mad. The irresponsible rise in the money supply fuelled an unprecedented boom in prices for land, houses and business property and it came to be assumed that values could only keep on rising." Observe that this boom could never have occurred if it had not been for the CCC green paper. I believe I was the only financial writer who criticised it at the time as a dangerous and regressive step. To give freedom to moneylenders when the money supply was being inflated, and industry was not ready to Invest on a big scale, was madness. It meant financing the worst sort, as well as the decent sort, of property developers.
The property boom began to collapse in the middle of 1973. House prices were the first to give way and building land is now nearly 40 per cent down from its peak price. The market value of commercial properties has fallen by about 20 per cent. The Tory government put 'paid' to the latter boom by freezing commercial rents as at November 1972. It took up a populist anti-property line — let us not say that it was intended as a popular vote-catching move —by restricting the issue of office development permits, by proposing the compulsory management and penal rating of empty office buildings (with Mr Peter Walker threatening Mr Harry Hyams) and by putting a tax on first lettings of new buildings at income tax or corporation tax rates. The Labour government has gone further. Its first act was to freeze house rents. Then it has given effect to the tax on first lettings in clauses 35 and 36 of its Finance Bill. And in clause 29 it has also proposed that certain development gains from land are to be taxed as income.
These semi-confiscatory tax proposals have frozen many development schemes. Some of the large property companies now find themselves saddled with heavy interest charges on developments which are not yet revenue-producing, so that cash flow is negative. And the `secon
dary banks,' which had lent money to speculative builders, find that their collateral is vanishing with the sharp fall in the value of flats and houses. Mr Crosland has added to the property slump by announcing that he is bringing forward his proposals for the nationalisation of 'development' land.
The Bank of England has been mounting rescue operations for these secondary banks to an amount of some £600 million which is really a ridiculous thing to do while the fall in commercial and residential property goes on. Sir Brian Mountain, the chairman of Eagle Star, has just issued a warning that his company cannot go on indefinitely pumping cash into City rescue operations. The sad story of Vavasseur adds point to his caveat. The first rescue operation in February for this 'secondary bank' was insufficient, although the clearing banks lent money and the great Prudential took over its life assurance subsidiary. The reason was that the fall in the value of its property holdings gathered pace while the money was being pumped is. Vavasseur shares are now quoted nominally at 20p having been as high as 246.
How right Sir John Foster was to emphasise in his article that this dangerous financial crisis will not be overcome until the Government unfreezes commercial rents and restores an investment market in property. The last government did actually fix a date around the autumn of this year after which commercial rents would be allowed to rise gradually to their proper level. The present government must swallow its anticapitalist prejudices and do the same. Otherwise bankruptcies on a larger scale may develop in the property world. If that were to happen the financial crisis could spill over into the merchant banking field.
With the unfreezing of commercial rents the life funds and the pension funds would then be able to take over from the property companies some of their development projects. Unless they do so, many of these property companies will be unable,to repay their bank loans and some of them will go bust. The Labour government would be justified in taking this sensible unfreezing action because much of the trade union pension funds are heavily invested in property, and, as Sir John Foster said, until the investment market in property is restored, "the security of all pension and annuity policies is impaired." Not only that the financial strength of the whole City of London, one of the world's great financial centres, will be regarded with suspicion. Perhaps that is what Mr Healey really wants — seeing that he is killing the stock markets by doubling the stamp duty, destroying the London market in South African and Australian securities, and driving out foreign workers from the City with his new chauvanistic tax proposals.
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