- u - nanmy Lifilr .71'
High Rents and Dear Mortgages
By NICHOLAS DAVENPORT
this election debate is about anything, which 'some people are beginning to doubt, it is about the dearness of money; in other words, the cost of everything. As far as I can see, I am the only sane financial writer who is trying to bring home to you crazy voters that you are in danger of electing candidates suffering from money hallu- cinations, oblivious that dear money inflates prices, wages and taxes as well as rents and rentier incomes. What we ought to do is to elect a government pledged to bring Bank rate down to 5 per cent in its first hundred days and to 4 per cent in the next. Even so, it would still be higher than the Bank rate in France and Italy, which is 31- per cent. Why not start heckling your candidates on this vital issue? Do you, sir, believe in putting Bank rate up to 7 per cent? Do you think we British should pay twice as much as the canny French or the improvident Italians for the cost of our money? Do you want to make Britain a paradise for bankers and a hell for borrowers and mortgagors? If the candidate starts mumbling about the £ and the balance of payments, just tell him to read the
SPECTATOR.
Let us concentrate this week on rent and mort- gage payments, which are simply the money rate of interest on the cost of building. The actual building costs have, of course, gone up, but not nearly so fast as the cost of money. When I was on the board of a new town in the far-off days of Dr. Dalton as Minister of Housing, we used to draw our money from the Treasury at 3 per cent. Thus we were able to charge rents of well under 40s. -a week for a three- bedroomed house costing under £3,000. Today this new town (having to borrow at 61 per cent) is charging 70s. 6d. to 75s. (exclusive of rates) and for new houses under construction with the improved space standards no less than 92s. 9d. to 99s. 3d. (exclusive of rates). No wonder the workers are demanding higher and higher wages when rents and rates are costing them over 100s. a week. Mr. Crossman's promise to pay half the increase in rates some time next year seems like pie in the sky.
The rising cost of mortages is another head- ache. The building societies are now charging an interest rate of 61 per cent, but have warned the Chancellor that they will have to raise the rate to 7 per cent or 74,- per cent if he does not give them a tax concession. Since most of them raised their borrowing rate to 4 per cent (tax- free) they have been working on too narrow a margin. Although money has recently been pouring into the building societies, they cannot cut their 4 per cent (tax-free) borrowing rate now that the Chancellor is issuing a new National Savings Certificate to yield the equivalent of 71 per cent gross. So 71 per cent looks inevitable for mortgages after the election. But 61 per cent is bad enough. This is what a building society loan of £4,000 would cost at 61 per cent over a term of twenty-five years assuming that the borrower is subject to income tax at 8s. 3d. and has no unearned income (the effective rate of tax relief would be seven-ninths of 8s. 3d.=6s. 5d. in the £). The fixed annual payment required on the `repayment' method (capital and interest) would be £335 1 ls., so that the total cost over twenty-five years would be £8,389. Deducting tax relief at 6s 5d. (£1,408), the net cost would be £6,981. In other words, the 61 per cent loan adds 61.4 per cent to the capital cost.
Having promised cheaper mortgages in the 1964 election—Mr. George Brown even throw- ing out the possibility of 3 per cent—the Labour government felt that it could not fight another election unless it did something to redeem its pledges and help the poorest and most miserable of mortgagors. So the Minister of Housing, Mr. Crossman, being denied `two-tier' cheaper money by the Treasury, thought up two ingenious schemes. First, he increased the subsidies for council houses by an amount calculated to meet the extra cost of money over 44- per cent. This will slow down the rise in council house rents, but it did not, of course, do anything to in- crease the volume or reduce the cost of council money available for 100 per cent mortgages. Next, he gave the individual house-owner a valuable option. I had expected him to introduce some modification of Professor Merrett's scheme whereby the poor mortgagor not paying the standard rate of tax would be able to claim the same tax relief as the man paying 8s. 3d., but this idea was rejected because it had too many awkward Inland Revenue repercussions. (There are apparently 3,000,000 mortgagors getting tax relief at 8s. 3d. and 250,000 with surtax relief as well, while 750,000 only get relief at 4s. 8d. and 250,000 no relief at all.) So Mr. Crossman proposes to give all mortgagors—old and new- comers—an option either to go on paying at the old rate and claiming the full tax relief or to forgo tax relief and pay at a notional rate of interest 21- points below the going rate with a minimum of 4 per cent. The Government, he said, with Mr. Callaghan's gracious consent, would pay the building society or the local coun- cil the difference between the notional rate of 41 per cent and the present going rate of 61 per cent. Excluding newcomers, the scheme would cost the Treasury no more than £10 million to £12 million in a full year. People expected to exercise the option would be those earning under £20 a week with one child or under £25 a week with two or three children.
Now this is certainly a very ingenious scheme, and for all I know it will swing the floating vote into a flood-tide for Labour. But it is no substitute for cheaper money. It is merely an anodyne which kills the pain of dearer money for those hard-pressed mortgagors whose income is not large enough to meet the heavy burdens of their mortgage loans. Incidentally, it does not even please the building societies, who are complaining of the heavy and costly paper work involved, or the life assurance companies, who, like the building societies, were never consulted because the scheme was rushed out so hastily for the election. The Government must really try to cure the endemic disease which is causing the social pain—the addiction to excessively high Bank rates in countries dominated by conven- tional bankers subject to balance of payments hysteria. This is a form of drug-addiction which in the end destroys the growth of the patient. Surely the Government has clever enough money-, • doctors on its pay-roll in Whitehall—on loan from the universities—to work out a cure for this ghastly disease. I have tried in these articles to suggest remedies which could, I believe, effect a miracle in our interest rate structure.
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