Financing New Houses

BY HERBERT ASHWORTH wiR. HAROLD MACMILLAN has left housing for foreign affairs and, distinguished as the new phase in his career may be, it is fairly certain that in the course of it he will find it more difficult to achieve the clear-cut and decisive results he was able to claim on leaving his old Ministry. 1954 saw his party target of 300,000 houses per annum well and truly achieved, and the total production of new houses approaching the highest pre-war levels. Not only in the increased programme of house construction is satisfaction to be found, but also in the healthy readjustment between subsidised municipal housing and the numbers available to owner-occupiers. We tend to forget just how much the scales have been weighted in favour of municipal housing in the post-war years. In 1938, over 200,000 houses were provided by the private builder. In 1954, despite the improve- ment which has taken place, the comparable figure was less than 100,000. No one can really complain that the adjustment has gone too far. Nor is it expected that the number of houses avail- able for sale will be more than 120,000 in 1955 and 150,000 in 1956. On these estimates, local authorities will still be responsible for more than 50 per cent, of the total hbusing programme.

It is encouraging to report that the new houses which are being offered for sale command a ready market. The number of buyers shows no falling off, and it is evident that many young couples prefer to embark on home-ownership rather than wait for a council house, or put up with furnished rooms or a family sharing arrangement. The process of buying a house has been made easier by the scheme introduced by Mr. Macmillan, under which building societies can make advances of up to 95 per cent. where the local authority is prepared to enter into a guarantee arrangement with the building society. The arrangement is a tripartite one, the building society, the local authority and the Treasury each taking a third of the liability; but the scheme can only be used where the local authority is willing to adopt it. Nearly two-thirds have done so, and a considerable amount of business is being done. The steady increase in the number of houses built for sale, coupled with the new scheme, mean that the advances made by building societies have also been steadily rising. £300 million was lent in 1953, and £370 million in 1954. By no means all of this was advanced on newly constructed houses. Building societies enjoy a large and well-sustained demand for mortgage accommodation arising from the turn- over of existing houses. They finance most of these transactions, which greatly outnumber the loans made on new houses. But so many of the existing houses are already in mortgage to societies by their owners that where a sale takes place the new mortgage by the purchaser is frequently offset (not necessarily in the same society) by the redemption of the vendor's loan.

It is a truism that building societies have either too much money to lend or have more demands for mortgages than they can meet. Looking back, it is probably true to say that in 1954 the two sides of the business were as evenly balanced as they are ever likely to be. Money was flowing in at a rather faster rate than in 1953. There was a net increase of some £216 million in capital subscribed by shareholders and depositors after allow- ing for withdrawals—an improvement of £59 million over 1953. The net increase in mortgage assets was £178 million, and sbme £36 million was added to gilt-edged and other liquid investments. It is a fact that investors were sought after rather than dis- couraged. On the other hand, societies were able to satisfy the demands for loans where the borrowers and the properties were both approved.

The situation is somewhat changed at the present time. The number of new houses for sale has increased, and the market in existing houses has been firm, with prices tending to rise a little. In consequence, the demand for loans has been higher than ever, and there is little doubt that, given the requisite funds, this year's lending would be in excess of £400 million. But this heightened tempo of mortgage business has been accompanied by some falling off in the rate at which funds are flowing in. A number of factors are responsible. For one thing, we have moved into a period of higher interest rates in which, to yield-conscious investors, build- ing society shares are not quite as attractive as they were.

But above everything else, what has come as the really un- pleasant shock to building societies is the heightened tempo at which investors have been deciding to call for repayment of their shares and deposits. Expressed in percentages or looked at on a graph, there is nothing unduly alarming or embarrassing about these withdrawals. They have, however, curbed the upward march of both the percentages and the graph lines which has characterised building society results over the last few years. It is fairly well agreed among building society executives that this increase in withdrawals is occasioned by a return to the equity market of money which, as a precautionary measure, was taken out of that market during.1954. It may, in part, be money belong- ing to those who are venturing for the first time into something more exciting and, perhaps, more rewarding than building society shares. The surge of withdrawals is not all caused by the rush to the equity market. Reports suggest that among the repayments are cheques for cars and other items of personal consumption.

All of this may well be a temporary phase of a kind which building societies have experienced on occasions in the past. It has, in the meantime, resulted in a severe curtailment of mortgage lending, and it is no longer an easy matter to arrange finance for house purchase. An increasing number of cases are being diverted to local authorities.

Does this portend an upward adjustment of interest rates to redress the balance? A number of the smaller societies (always the first to be affected by a money shortage because of their more restricted appeal) have already stepped up their share rate from 21 per cent. free of tax to 24 per cent. Others may want to be more certain that interest rates generally are going to remain at the higher level to which they have recently moved. Or, indeed, that a rise in rates will remedy a situation in which the principal factor is the attraction of the Stock Market and the possibility of tax-free gains. Building societies aim at stable rates, but do not ignore the longer-term trends, and their investing members have found that over a period they have had no occasion to quarrel with the return they have received.

But it is not only the return on building society shares which has rendered them attractive to so many investors. They offer excellent security, since the funds are nearly all lent on private dwelling- houses, the average mortgage debt being no more than £830. Borrowers repay their loans by monthly instalments, and, as might be expected in conditions of full employment, societies report few cases where payments are in arrear, and losses are extremely small. Again, there are no fees or costs attendant upon investing; and the investor can easily and readily withdraw the whole or part of his holding. Both for the investment of lump sums and for the regular saving of smaller amounts, building societies are particularly well

suited. It has been one of their two functions for well over a hundred years. Their total assets are now approaching £2,000 million, and their shareholders number 2,800,000. They comprise a broad-based group of institutions which can now claim to take its place as one of the most important savings and investment repositories in the country.

Finally, for the statistically-minded, here is a table of some of the salient figures illustrating the growth which has taken place in the last ten years :

1944 1949 1954

Total No, of Societies 905 835 777 Share Investors 2,049,000 2,177,000 2,802,000 Depositors 754,000 679,000 590,000 Borrowers 1,361,000 1,442,000 1,878,000 Share Balances £585 m. £855 m. £1,535.m.

Deposit Balances £148 m. £201 m. £221 m.

Due on Mortgages £561 m. £953 m. £1,573 tn.

Investments .. £199 m. £145 m. £220 m.

Total Assets .. £795 m. £1,141 m. £1,867 m.