Investing in Building Societies
THE relatively high and " tax-free " rates of interest offered by building societies for money deposited with them or invested in their shares is prompting many people to inquire as to the safety of capital so invested and the prospect of continuance of regular interest payments. Formerly only investors of very modest means were attracted to building societies. Rates of interest offering in other channels were almost equally good, and income-tax was not so important. The first stimulus to a wider extension of the investment appeal of the terms offered by building societies came from the high rate of income-tax ; the second arose from the inauguration of the " cheap money policy " in 1932 which reduced the yields on high-class securities well below the rates offered by the building societies.
Why, it is asked, can the building societies offer such favourable rates if the security is first class? The answer is that long-term rates have not fallen so much as have short- term rates, and the lending rates of building societies have not fallen quite so much as have the rates on high-class Stock Exchange securities.
The building societies have, of course, reduced their lend- ing rates and their borrowing rates, the fall in both being just over I per cent. in the last "ten years, but such reduction has still left the interest rates which they offer on deposits and loans very attractive in comparison with that on gilt- edged stocks.
INVESTMENT RESTRICTIONS RELAXED When the boom in gilt-edged stocks on the strength of cheap money reached its height the building societies were offered so much money that they were obliged to limit its acceptance by placing restrictions on the amounts they would take from individual lenders. Now these restrictions have been largely relaxed, for the reason that mortgage business has been maintained in quite surprising fashion, while money has not been offering quite so treely, owing to the inter- national crisis and the general disposition to refrain apparently either from investing or spending. That the societies are able to offer tax-free " rates of interest is attributable to the fact that they pay tax on their profits and do not deduct it from the interest paid out on shares and deposits owing to their special arrangement with the Inland Revenue authorities. That the rates offered should be so relatively high results from the „fact that they are " borrowing short and lending long," which does not sound particularly safe, as a matter of theory, but has in practice proved thoroughly sound. One of the great attractions of investment in building societies is the absence of fluctuation in the value of the capital, which in the case of a Stock Exchange security is dependent upon the market price. A building society de- positor or shareholder is always entitled to repayment of his money in full, after giving the stipulated notice that he wishes to withdraw his money.
INTEREST RATES MAY FALL FURTHER The investor must realise, however, that the rate of interest he receives is not guaranteed in perpetuity ; the societies can reduce the rates if they find that they are being offered more money than they can employ, or they can raise the rates if they are not getting enough for their lending operations. All the time, of course, their mortgages are being repaid by instalments, and so they only require sufficient money from new depositors and shareholders to provide for new lending in excess of repayments and to replace any deposits or shares that may be withdrawn.
If building activity slows down, the societies will need less money and may be impelled to re-impose restrictions on the acceptance of money, or even to lower the rates they pay. On the other hand, if interest rates on Government stocks rise, as the result of the heavy borrowing for rearmament, the societies may have to offer higher rates to obtain the money they want, and if this competition should go far enough, they might have to raise their lending rates to borrowers.
AIR RAID RISKS AND SECURITY The security behind building society deposits and shares consists, of course, of the value of the houses plus the per- sonal security of the host of borrowers who have made use of the facilities offered, and the loans on the houses are only made to the extent of 70 per cent. or so of their value, and the debt comes down with the payment of each instalment.
The only unsatisfactory feature of the position of de- positors and shareholders in building societies at the moment is the absence of facilities for the covering of the risk of air raid destruction.
This week the Government has at length shown signs of retreating from its former position, under which it merely held out a hope of_ some compensation payable on the con- clusion of hostilities to the extent that Government funds might then permit. Even now, it refuses, in advance, to countenance any scheme which will provide for full com- pensation, but has agreed to submit the matter to examina- tion in expert hands, and there is a hope that something will emerge from this examination which will safeguard the position.
Property, after all, is the foundation of all security. Every member of the community is concerned in it in some way, and it does not say much for the Government's faith in its defence measures against air raids if it shrinks from the responsibility of insuring the property that it has to defend against air-raid risks.
As far as the building societies are concerned, they have an insurance of a kind in that their risks are widely spread, but, even so, the risk is not one which they should be called
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