EGBRIMII
The Building Society Fracas
By NICHOLAS DAVENPORT
THERE is something comic in committing the building societies to the scrutiny of the Prices and Incomes Board because they dared to raise their mortgage rate from 61 per cent (which had held since February 1965) to 71 per cent. As most people know, the building societies lend money on house mortgages at fractionally below the ruling market rate. The local authorities are now charging up to 7f per cent—some even 8 per cent. So intense is the demand for house mortgages that the building societies would have no difficulty in securing 71 per cent if they wanted to. But they are not profit-making entre- preneurs. They have a long record of tender- ness towards their borrowers and seek to main- tain the right balance between their 'charging' and their 'striking' rates: that is, between what they charge a borrower and what they pay to an investor. What seems to have exasperated the Chancellor and the Minister of Housing at the unhappy confrontation at the Treasury last week was the fuddy-duddy way in which they pre- sented their claim for 71 per cent, basing it on the sacrosanct nature of their reserves, their liquidity ratios and other historical what-not. Mr Crossman warned the societies not long ago that in a world of rapid social change they must really bring themselves up to date. He repeated this warning in an argument with Mr Donald Gould, the chairman of the Building Societies Association, on a BBC television programme following the confrontation, in which he dropped this significant remark : 'We wondered whether really it wasn't time tp change.' It looks as if a critical report from the Prices and Incomes Board might be the occasion for a searching govern- ment inquiry into the whole set-up of the build- ing society movement.
In the context of a modern mixed economy the building societies appear to be hybrid insti- tutions owing allegiance neither to the public nor the private sector. In a recent article* Mr Stanley Morton, the general manager of the Abbey National, declared that no one knows what the Government really wants of the build- ing societies or what the building societies want of the Government. Over the past seven years, he said, they had conducted 'an uneasy court- ship.' This is surely the wrong metaphor. A new Labour government, enjoying real power for the first time, feels towards the building societies, not like a suitor, but like the inheritor of a great estate confronted with a fussy dowager aunt who won't leave the family house and gets in the way of its reconstruction.
To retain trustee status, free reserves have to be 21 per cent on the first £100 million of assets. As these reserves have to be provided out of surplus earnings, the societies were greatly upset when their profit margins were sqUeezed by the new capital gains tax and by the Selective Em- ployment Tax (which will cost them over £720,000 a year). Disappointed by the absence of any tax relief in the last budget—although the corporation tax has reduced the rate of tax paid on their surpluses from 561 per cent to 40 per cent—they insisted that the present structure of rates (4 per cent/6f per cent) did not allow an * Supplement to the Investors Chronicle, May 20
adequate margin for the accumulation of re- serves. Yet the reserve ratios of all the big societies range from 34 per cent to 4; per cent. Naturally, Labour ministers who are not familiar with historic building society finance are apt to become bored by their conservative approach and begin thinking of more up-to-date financial institutions.
To begin with, there are far too many build- ing societies and most of them are far too small for economy and efficiency in management. They number over 600 and about a tenth of this num- ber account for 90 per cent of the total assets of over £5,500 million. There is clearly scope, as Mr Crossman has said, for mergers and rationalisation. All of them pursue the unsound financial practice of borrowing short to lend long, the average term of their mortgage agree- ments being twenty to twenty-five years. The building societies are being used, in fact, by the private investor as a medium for his 'liquidity preference'—as a depository for his surplus funds which may be wanted at any time for some other purpose. To make matters even more farcical, the building society is in direct com- petition with the Government for the savings of the liquidity-seeking petty rentier. When Mr Cal- laghan raised the rate of return on the new Savings Certificates to the equivalent of 71 per cent gross, he began to divert a considerable flow of savings from the building societies to the Ex- chequer. When the societies raised their invest- ment share return to 4 per cent tax-free last July, they diverted the flow of savings from the Ex- chequer to themselves—to such an extent that they gathered in £465 million in six months (making £657 million for the year).
Then there is the competition between build- ing societies and local authorities. There is supposed to be sweet harmony between them for the sake of the national housing drive, but, as Mr Stanley Morton has said, the societies are 'naturally opposed to local authority com- petition in subsidised terms which would enable
councils to undercut the building society rate.' The societies insist on the borrower having 'a personal stake,' putting up 10 per cent to 20 per cent of the value of the house, but when the local authority tries to help the borrower with a guarantee the societies find the guarantee scheme 'of such massive administrative incon- venience,' according to Mr Morton, 'that it must be counted a failure.' There is always some 'massive administrative inconvenience,' even when the Government tries to help the borrower. Take, for example, the mortgage option scheme, which was designed to help the low-income man to become a house-owner. The building societies declared that the administration of it would add grievously to their costs. They produced an alternative scheme based on a straight 21 per cent interest subsidy. I am sure that it was an easier scheme to work, but it has snags for the Inland Revenue and it must have confirmed the impression that the building societies arc an awk- ward, creaking. anachronistic organisation which refuses to mo% e ith the times and bring itself up to date.
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