Cheap Credit and Tax Breaks Set Off Booms

The biggest American real estate booms of the last century started when borrowing suddenly got easier or when the tax law suddenly made buildings more profitable to own. Each one ended when that advantage went away.

The homebuilding boom after the Second World War started with a loan guarantee. The GI Bill, which President Roosevelt signed in June 1944, let the Veterans Administration guarantee veterans' home loans, and from 1944 to 1952 it backed nearly 2.4 million of them. In 1940, 44 per cent of American households owned their homes, the Census Bureau says. Within about two decades after the war, more than 60 per cent did.

The office boom of the 1980s started with the tax code. A 1981 law let investors write off a commercial building over 15 years instead of 40, which the FDIC calls a major reason for the building rush that followed. Deregulation had also made property loans profitable for banks, and they lent heavily. In the country's 31 largest office markets, new office space went from an average of about 34 million square feet a year in 1975 through 1979 to about 98 million a year in 1980 through 1984.

The Tax Reform Act of 1986 took most of that back. It ended the faster write-offs and stopped most investors from using losses on rental property to cut the taxes on their other income. Office vacancy in Austin reached nearly 40 per cent in 1987, and when banks cut back sharply in the early 1990s, commercial property prices fell across the country, the FDIC found.

The housing boom of the early 2000s was a credit boom. The Financial Crisis Inquiry Commission found that low interest rates and easy money created the conditions for a credit bubble, and it counted the failure to rein in excesses in mortgage lending and finance among the principal causes of the crash that followed.

Each boom was started by something outside the buildings: a federal guarantee, a tax write-off, a flood of mortgage money. Because commercial property is mostly bought with borrowed money, its prices move with interest rates and credit, the FDIC notes. The people hurt most were those who bought, built or lent late, counting on the advantage to last. A big project takes years to finish, so one started at the top of a boom can open in the bust.