The mortgage rate muddle
Nicholas Davenport
The Government deserves no sympathy for the crisis in money rates and mortgage rates which has overtaken and upset the smooth operation of Phase 2 of its Counter-Inflation Act. It has brought it all on itself by the precipitate action it took in its White Paper on Competition and Credit Control (September 1971) to restore freedom to moneylenders. No government should ever think of restoring freedom to money-lenders.
In the financial jungle there are always many wild beasts. Would a responsible game warden ever think of leaving out parcels of meat in his garden for his domestic dogs when marauding wild animals would be the first to pounce and gobble them up? The big increases in advances which the clearing banks were free to make in 1972, provided they maintained the prescribed liquidity ratios, were mostly snapped up by the marauding property speculators and getrich-quick financial houses — the wild bulls intent on land grabbing and house building, company mergers and stock exchange profits — long before the domestic businessmen thought of using the money for investment in their business. There were even some foxes among the businessmen who were quick enough to use up their overdraft facilities to snatch an interest profit by buying certificates of deposit or lending day-to-day money in the ' street ' to needy local authorities. The latter rate was up to 11 per cent last week.
No wonder the building societies have been faced with large-scale Withdrawals and have had to put up their investment rate to 6.3 per cent tax free, which is equivalent to 9 per cent gross under the new tax system. They have met this Wednesday to decide on new mortgage rates to the great embarrassment of a Government trying to hold the cost of living down under Phase 2.
A rise in mortgage rates falls heavily on the family budgets. A clerk who had to borrow, say, £5,000 from a building society at 8i per cent over twenty-five years is paying £40.75 a month. With tax relief on the interest charge he may in the early stages be paying a good deal less. With the mortgage rate now raised to 9i per cent the monthly payment becomes £44.15. His salary of say £2,000 will not have gone up during the freeze and if he now gets a rise of £1 plus 4 per cent he will in the autumn be better off by only £93 net. So the extra 1 per cent on the mortgage rate eats up nearly a half of his net salary rise. And food price inflation the rest.
If governments really meant to kill inflation they would have to direct the flow of national savings into social investment like housing and fix a specially low rate for house mortgages as the French do through their Cr6clit Foncier. Direction of this flow of savings is entirely practicable. Last year, according to Mr Barber, the National Savings media took in £800 million net. The flow of savings into the life and pension funds is now over £1,500 million and will soon be approaching £2,000 million a year. Independently of these flows the building societies, who account for 90 per cent of all housing mortgages, took in over £2,000 million and advanced £3,649 mililon.
It has been suggested that if the Government were to give the building societies fiscal aid by reducing their composite tax rate they would take in far more but this has tax complications on the investment side.
I see that Mr Anthony Crosland, Labour's shadow minister of housing and environment, recently proposed that the building societies should invest more of their peak earnings in a stabilisation fund to ensure against being caught out on rainy interest days. It is extraordinary that he did not propose when he was a socialist Minister of the Environment that a Labour government should take over the building societies, combine their finance with the flow of national savings and guarantee cheap mortgage rates for home buyers.
The inflow of savings into the building societies presently depends, of course, on relative rates of interest. The flow was good in the last three years because their borrowing rates remained at 8 per cent while short-term money rates fell temporarily from 8i per cent to 4 per cent by the end of 1971. The inflow is now bad because short-term money rates have risen to 10 per cent and over. And we have Mr Barber actually competing with the building societies in his official capacity by offering a new five year Savings Bond with an 8 per cent coupon. and tax-free bonus on maturity of 3 per cent. Yet less than two years ago the Bank of England in its paper on Competition and Credit Control admitted that competition for individuals' savings might hurt the building societies. The fact that the building societies now have to compete for money and put up their rates, so adding to the inflation through dearer mortgages, makes nonsense of the Government's Counter-Inflation Act. But none of this absurdity need have arisen if the Government had directed, as it should, a proportion of the national savings into social investment like housing and made the building societies their agents for the purpose.
The mortgage rate crisis is made all the worse by the shocking rise in the price of new and old houses to buy. The average rise in new house prices last year was 47 per cent — more than twice the rise in 1971. There were, of course, wide regional differences — the steepest being the south. For modern secondhand houses the rise was 39 per cent and for older houses 41 per cent. The rate of increase slowed down in the last quarter of the year and some optimists believe that the peak has been passed. Perhaps the penalty now laid on not developing an approved site within a certain time will do something to speed up housing starts, but it is the price of the house which puts up the price of the land, not vice versa.
According to Mr Paul Channon, the Minister for Housing and Construction, the crude housing shortage has already been overcome in many areas of the country although there are still areas of stress with urgent housing needs. During 1972 a total of 350,400 houses and flats were started compared with 343,000 in 1971 and of these 227,400 were for private owners. There was a small decline in council houses. Total completions were 319,100 against 350,500 in 1971. The feature of 1972 was the big jump in the number of dwellings improved with grants — 283,100 against 191,800 in 1971. Approvals for grants were 58 per cent higher than in 1971. This points to a financial racket. A speculator can buy an oldfashioned house, convert it into flats and receive an improvement grant of, say, £1,000 per flat The buyers of the flats will pay a price covering the full cost of the improvement — and the speculator's enormous profit. I feel the more indignant about this racket 'because I recently converted an old milkingparlour into a worker's bungalow (not for sale) and received a grant for much less than half the cost of conversion.
It will be observed that I have little sympathy for independently managed building societies. They will keep their investment rates up when other money rates are falling and so, being flush with money for mortgage lending, they will accentuate a demand for houses at the wrong time and put up the prices of both houses and land. They need to be put under some form of State control — like other moneylenders.
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