In the City
Suitors for the savers
Jock Bruce-Gardyne
Itmay be that the Daily Mirror does not currently count a very high proportion of building society general managers among its readership. But next year the proportion should be even lower. That is if the whistles and assorted catcalls of his erstwhile col- leagues to speed Mr Clive Thornton on his way from the Abbey National to Holborn Circus are anything to go by. In his four years as chief general manager of the Abbey Mr Thornton has contrived to tread on several corns, and his decision to withdraw from the recommended mortgage rate cartel was regarded as the ultimate betrayal. It will be interesting to see whether the BSA has the last laugh: by declining to take his heavy hints and cut the mortgage rate before the New Year at the earliest, the Association has dared Abbey National to go it alone; and with Clive Thornton on the point of departure it looks as though his society may decide that discretion is the bet- ter part of valour after all.
Yet in reality Mr Thornton was no more than a catalyst and perhaps accelerator to events which would have happened any- way. The competition for the savings of depositors between societies has been in- creasingly aggressive for two years or more and against that background it could only have been a matter of time before the im- posed restraint upon the other side of the balance sheet gave way. If the Abbey National had not walked out, the latest news that the high street banks are rejoining the pursuit of home purchasers might have turned the trick.
On the face of it this was an unexpected development. When the banks entered the market for housing finance in a big way two years ago the impression was that their real target was the retail depositor, whom they were anxious to wean away from the building societies. They wooed the would- be home owners most successfully; they were not so notably successful in wooing the depositors. So, some six months ago, for the most part they called a halt, holding on to the market shares they had acquired (predominently at the top end of the market), but ceasing to go out for more. Since then, however, the building societies have been taking in cash as if it were about to go out of fashion, and forcing the clearers back into the wholesale markets for deposits in the process. Now the banks have decided to resume the challenge.
All this must be viewed in Great George Street with mixed feelings. In theory com- petition is this government's watchword. But in this case there could be awkward consequences. When the banks last surged into housing there were a lot of soothing noises about how they were simply taking custom from the societies. But the figures suggested that there was at least a substan- tial element of 'additionality': in other words that the amount of lending being done by banks and building societies together largely exceeded the business the societies would have been doing on their own, This time it looks as if the emphasis will be much more heavily on the attraction of deposits. But either way the repercus- sions for interest rates could be unwelcome. If mortgage lending rises sharply, this is go- ing to show up in the broad money ag- gregates, and oblige the Government either to let them overshoot embarrassingly, or to sell a lot of extra gilts at whatever rate of in- terest is needed to get them away. If com- petition between banks and building societies for the favours of depositors leads to still more generous 'premium offers', then National Savings could be left on the shelf unless it follows suit. At which point that already deferred cut in the mortgage rate could vanish down the plughole.
Which would not be very well received in Downing Street. Unfortunately the possible ripostes would require a lot of political nerve, to put it mildly. The most radical suggestion, canvassed in some quarters, is that the Government should put a limit on the present open-ended obligation on the social security system to pick up whatever mortgage rate its claimants face. The Government, it is argued, could lay down that any excess in mortgage rates over bank base rates would not be met: whereupon the prospect of a huge crop of defaults would be sufficient to force the societies (and the banks) to drop their mortgage rates.
The trouble here is that the mere thought of a host of social security claimants being thrown out on the street for failure to meet their mortgage commitments would surely be sufficient to stay the politicians' hands. It is always possible that a threat of such action would suffice to induce the cut in mortgage rates. But if that did not work it is very hard to see the Government turning such a threat into reality.
The other obvious riposte concerns, inevitably, that hoary old bone of conten- tion, mortgage interest relief. Here the abstract case for a change is a strong one, and growing stronger. The justification for tax relief on mortgage interest is, of course, the desirability of home ownership, and it has been immensely successful in that respect. A subsidiary justification was that council tenants' rents were similarly sub- sidised from taxation; but as local authorities have been pressurised to move their housing revenue accounts towards balance the validity of this justification has receded. But in a period of high real rates of interest the temptation to home owners and home buyers to 'take out equity' in their houses by increasing their mortgages up to the ceiling permitted for interest relief, and then diverting some or all of the resultant loan to other purposes, has proved irresisti- ble. The Bank of England recently reckon- ed that about £7 billion a year borrowed with benefit of tax relief was not being used for housing: by the first half of this year, it told us, almost half the cash supplied for this purpose was ending up elsewhere.
Now it will be argued by some that this is just as well: that if all this mortgage money had not been finding its way into the high streets there would have been no consumer boom, and with no consumer boom no lift- off from the depths of the recession. But even if the overriding importance of keep- ing the check-outs busy were accepted and I doubt the Treasury would accept it, at any rate without reservation — this remains a lopsided way of doing it. If our purpose is to maintain the momentum of the spending spree on credit, then we should make all forms of interest allowable for tax relief, as Tony Barber did briefly in the early 1970s (with consequences which were not, perhaps, quite what he had expected). To enable home owners to buy their Italian washing machines, German cars and Spanish holidays on cheaper credit than those who happen to rent their accom- modation is not easy to defend in equity.
To scrap mortgage interest relief, however, would require our rulers to make a feast of past commitments, and is way outside the realm of practical politics. The most that Chancellor Lawson could dare to do would be to restrict mortgage interest relief to the standard rate of tax. The resulting saving of 'tax expenditures' would be small, and the impact on the perfor- mance of the money aggregates negligible. But as a PR exercise it could look attractive come next Budget time — particularly if the Chancellor is minded, as he could and should be, to eliminate the present disparate treatment of overseas investors by cutting the stamp duty on domestic transac- tions to one per cent, and/or to reduce the fiscal bias in favour of institutional savings by eliminating or reducing the investment income surcharge.
Meanwhile, what are we to make of the decision not to send the battle for the ownership of Eagle Star to the Monopolies and Mergers Commission? Good news, ob- viously, for Eagle Star shareholders. Good news too, presumably, for Allianz. Whether it turns out to be good news for BAT shareholders may be more uncertain: their directors could have their work cut out to show they knew how to justify a higher price for Eagle than their opening salvo. But it would, I suspect, be premature to assume that this decision necessarily presages a less interventionist approach by the new Department of Industry team, Had Allianz chosen General Accident, based in Perth, as its partner, instead of Eagle Star, based in the City of London, would the response have been the same? I wonder.
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