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London 1970 - 1976: A case study into Real Estate Market Cycles

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"The years since the early 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks."

C.A Kindleberger and R.Z. Aliber: Manias, Panics and Crashes, 2011

The London office market cycle of the early 1970s commands attention because it inaugurated four decades of asset and financial market volatility. If lessons were to be learned from the London events, they do not appear to have been very well learned. Even now there is little agreement on the warning indicators and optimal policy responses to impending market cycles. This Case Study does not set out to offer a convenient check-list of settled conclusions; but it does pose questions that can be fruitfully debated by real estate market participants, regulators and financiers.

1 The 1970s office market cycle in London imposed a range of costs, but can also be said to have delivered long-term benefits. What were these costs and benefits, and how could these be estimated?

2 Policy-makers, commercial and central bankers, property investors and developers all contributed to the boom and the bust phases of the cycle. What are the key lessons for each of these actors? Have these lessons been learned?

3 What indicators emerge from this case study as early warning signals of future real estate market downturns?

1 Urban planning policies were designed to limit the demand for, and supply of, office space in the City of London in the decade prior to 1973. Viewed in isolation, were these policies desirable? Could the same objectives have been achieved in a better way?

2 Could the Bank of England have acted differently once the market downturn commenced in 1974? What were the alternatives to the "Lifeboat" strategy?

3 What actions could have been taken by commercial bankers and real estate investors prior to 1974 in order to limit their vulnerability to a downturn?

4 "Given the broader fiscal and labour market challenges faced by the Heath government, including the oil price shock of 1974, the London office market crisis can be regarded as 'collateral damage'."

5 "Next time will be different." Identify key differences and similarities between the current state of global office markets and the early-1970s situation in London.

6 "Deregulation of the banking sector increased the demand for office space in the City and also facilitated access to debt finance to fund construction of additional space."