W ell, the chickens certainly seem to have come home to roost since my last Lesson from History. As I write, the papers are full of the possibility that one of Scottish Equitable’s property funds may not be able to allow its investors to exit for more than a year, which is not the sort of ‘lock-in’ that is likely to prove particularly appealing. And the suggestions are that this is not the only property-based investment vehicle that is going to have to take similar action. Property is inherently an illiquid asset, and there are times when property investors just have to sit tight and wait for market conditions to improve.

For a large part of the 1980s there was a property boom, in both the residential and commercial property markets. The specific factors affecting residential and commercial property differed, but the underlying themes were similar.

High borrowing costs
I promise readers under the age of 30 that this is not a fairy tale – at the end of 1989, base rates were 15 per cent. That’s right, 15 per cent, a sobering thought for any overstretched borrower who thinks that 5.5 per cent is far too high and should be cut.

Of course, this was the culmination of a series of rate rises that had the effect of reducing the attractiveness of borrowing in order to fund any commercial developments or, indeed, the practicality of borrowing even to buy a house. The commercial sector also had an oversupply problem, as a development boom in the second half of the 1980s led to a large number of empty offices, particularly in the City of London, at the start of the 1990s, especially as the newly yuppified Docklands developments started to come on stream.

Meanwhile, in the residential market, a house price boom had been sustained against a backdrop of rising interest rates, by MIRAS – Mortgage Interest Relief at Source – a fantastic wheeze where homebuyers got tax relief on their mortgage payments.
Margaret Thatcher’s long-standing Chancellor, Nigel Lawson, gradually phased MIRAS out, first limiting it to only part of the mortgage loan, then to only one mortgage payer (where for example, there was shared ownership) and finally scrapping it entirely.

The fact that these changes were often phased in over time simply increased the upward pressure on house prices, most notably the removal of ‘Double MIRAS’, which Lawson famously described as ‘a tax on marriage’.

This was announced in the 1987 Budget but not implemented until the end of August, causing a scramble of flat and house sharers to buy before the reduction of the tax relief. Of course, the circumstances are very different today, but there are still some disturbing parallels. Both the residential and commercial property markets have experienced a period of boom that cannot be sustained.

Credit crunch
Certainly, interest rates are much lower than at the beginning of the 1990s, but overall indebtedness is much higher. Also, we have seen the rise of the multiple
buy-to-let investor, who may be financing loans on several properties simultaneously; and these are borrowers who will be feeling the pinch, even now, at these relatively benign levels.

The implications for the housing market, however, are simply that price rises will slow – indeed, there is current evidence that prices have, on average, stagnated – rather than the dramatic house price crash we saw in the early 1990s.

The picture for commercial property  is not so rosy. Recent IPD index figures, which monitor returns on institutional property portfolios, reveal the biggest monthly fall in capital values in its history. Since this index began in 1986, it is clear evidence that the commercial property sector’s sustained boom has now come to an inevitable halt.