Building Societies and War-Risks
IF John Smith bought his house with money advanced by the X Building Society, out of money deposited with the Society by Thomas Robinson and his three million fellow shareholders and depositors, and if a foreign aeroplane dropped a bomb on Smith's house, the legal position is clear. The insurance company would not rebuild the house; the Building Society would remain responsible to Robinson, and Smith, now homeless and perhaps penniless, would remain responsible for the mortgage. In most instances he could also be called upon to rebuild the house. It is safe to assume that many of the Smiths would be unable to fulfil their obligations and that, if there were extensive air-raid damage, the building societies would have to draw upon their exten- sive reserves to meet their obligations to the Robinsons.
That was the position existing through most of 1938. It has been improved appreciably by Sir John Simon's state- ment of last month indicating that in the event of war there would be arrangements to cover part of the damage to property. Yet in spite of the fact that through the whole of last year the building societies were exposed to that danger —a danger which looked very real as the autumn crisis deepened—the figures which are now being published make it certain that the building-society movement enjoyed very nearly, if not quite, a record year.
The previous record year for the building societies was 1936. Then they advanced no less than L140,000.000 of new money to owners of house property. Figures for 1937 were a little lower, but in spite of the much-heralded end of the building boom and of the incipient trade recession, the total fell back only £3,000,000. With the trade recession, let us hope, reaching its trough in 1938, and in spite of war-clouds deepening over Europe, the present indications point to a total of new lendings last year certainly much better than the 1937 figure, and possibly even surpassing that of 1936.
The accounts so far available also indicate that the flow of public money into the building societies has grown, and that the number of shareholders and depositors has risen. A few of the leading societies, notably the Woolwich Equitable, the National, the Northampton Town and County and the Temperance, have encouraged the flow of money by bringing their rate of interest into line with the general rate of 31 per cent., tax free, while the Abbey Road has indicated its willingness to accept larger sums at the exist- ing rate. It seems quite clear, however, that this greater willingness to accept new money is not dictated by any flight of existing money out of the building-society movement. Notwithstanding rather more than normal withdrawals during the crisis weeks the flow of money has, on balance, been strongly towards the building societies, and their greater willingness to accept it denotes merely their greater ability to employ it in their normal business of lending on mortgage.
The Halifax Building Society, which is by far the largest society in the world, has maintained restrictions on new investment throughout the year. The Society now shows total assets of over L128,000,000, and has advanced over £20,000,000 in five successive years. Though the total for the year ending January, 1939, at £20,340,996 was slightly down on the previous year.
The movement's record of stability, probity and liquidity amply justifies this exhibition of public confidence. It is in a sense only a continuation of a growth which has been pro- ceeding rapidly for many decades—a growth which built up the movement's total assets to £710,000,000 in 1937 and to a probable total of over £750,000,000 in 1938, a growth which has attracted nearly 3,000,000 shareholders and depositors and nearly 3,500,000 borrowers and which has naturally been accelerated by the desire in times of rising taxation to obtain a stable net income.
But there must clearly be some further special reason for the exhibition of strength provided by 1938 when the danger of war-damage to property and the desire to replace all kinds of investments by cash might have been expected to check normal growth.
One such explanation was provided in the recent speech made by Sir Harold Bellman at the annual meeting of the Abbey Road Society. He explained that a great nation- wide building society has the properties upon which its funds are mortgaged spread up and down the country and not concentrated in one locality, so that if they are vulner- able to air-raid risks they are spread geographically so as to minimise those risks.
Such a method of defence, valuable as it is, does not absolve the building society movement from its obligation to exercise every legitimate form of pressure to ensure that protection for property is provided, if not by insurance, then by Government action. The movement has, in fact, taken such action, and taken it in ample time. The leaders cannot be held blameworthy for the uncertainty which existed in the anxious period of last autumn. How far the recent pro- nouncement of Sir John Simon meets their views has not yet been disclosed, for at the moment the Building Societies' Association has reserved its opinion. But it would not be surprising to find that Sir Harold Bellman's view is widely held among those responsible for building society management. " In so far as the Chancellor has intimated the acceptance of responsibility by the Government and put forward concrete proposals he has met," said Sir Harold, " the case which the building societies have urged upon the Government for some considerable time. Within these limits the Government's action is appreciated. The proposals as out- lined, however, are not free from uncertainties, but provided the doubtful points can be satisfactorily elucidated they will go far to protect the societies'—and the mortgagors'— position."
In much the same sense the chairman of the Planet Build- ing Society, Mr. Walford D. Green, suggested that a spirit of enterprise would begin to be shown now that the Govern- ment had promised to make some provision for insurance. But he also hoped for a clearer and more comprehensive plan, and suggested that the insurance scheme instituted in the last War should be recreated.
Speaking shortly before Sir John Simon's statement, both the chairman of the National Building Society, Mr. W. F. Foster, and the chairman of the Leeds Provincial, Mr. Ger- vasse L. Ford, emphasised the urgent need for clarification, but pointed out that in view of the geographical spread and the intrinsic merits of property investment the danger could be exaggerated.
On the other side of the building society balance-sheet one seeks for an explanation of why so many more shareholders and depositors have brought money into the societies in a time of anxiety. Part of the answer, it must be admitted, is provided by the less satisfactory behaviour of other forms of investment. Investments which are rapidly fluctuating, and on balance falling in value, have obvious disadvantages if the investor feels that he may need to take his money out at short notice. The sharp fall in Stock Exchange values must deflect at least temporarily some money from that type of investment to the repayable type which the building societies and the savings banks alone provide.
Such a movement could only be deflected by a feeling that the societies might be unable to fulfil their obligations to repay investors, for example, by fears that an outbreak of war might lead to a moratorium. It is true that during the crisis there were some weeks of fairly heavy withdrawals, legitimate withdrawals by people who might have occasion to use their money. But there was no general withdrawal, any more than there was a general run on the banks.
A general demand for the repayment of building-society investments would imply a breakdown of the credit system which there is no reason to anticipate ; it is true that the building societies could not simultaneously satisfy all their shareholders and depositors. About 90 per cent. of their total assets are invested in house property and are not imme- diately liquifiable. But the proportion held in gilt-edged securities has been found by long experience to provide ample security. Moreover, the tendency among many societies this year is to add further sums to reserve.
J. D. MARVIN.
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