MORTGAGE INTEREST RATES (Hansard, 5 April 1973)

EARL JELLICOE
My Lords, with the permission of your Lordships' House, it might be convenient if I now repeat a Statement which is being made in another place by my right honourable friend the Secretary of State for the Environment about building society mortgage lending.
The Statement is as follows:
"The House will know that on March 16 the Building Societies' Asso- 426 ciation recommended to its members an increase in the rate of interest offered to investors to 6.3 per cent., but deferred a decision on the recommended mortgage lending rate.
"Since then the building societies have not attracted a sufficient inflow of funds and the Association has indicated to the Government that it would have to raise the recommended investment rate to 6.75 per cent.
"It also indicated that this higher investment rate implied an increase in the recommended mortgage rate to 10 per cent.
"The Government regard it as a high priority that building societies should continue to attract sufficient funds to support a high and stable level of housebuilding.
"They accept that to achieve this result an investment rate of as high as 6.75 per cent. may well be necessary at the present time because of the operation of certain special factors such as the recent marked increase in consumer spending which has affected the current pattern of savings.
"The Government think that it would not be right to increase the mortgage rate fully to correspond with an investment rate of 6.75 per cent. in these special circumstances.
"The Government have therefore offered a temporary bridging grant to those societies who find it necessary to have an investment rate of 6.75 per cent. but who nevertheless do not increase their annuity mortgage rate above 9.5 per cent.
"This grant will be available for a period of three months beginning with the date at which for each class of mortgagors a society's mortgage rate is increased to 9.5 per cent. or to-day, whichever is the later.
"The grant will be equivalent to the difference in receipts of interest for the three months period between a 9.5 per cent. and 10 per cent. mortgage rate on all new and existing loans to individuals for home ownership.
"The cost of the bridging grant is estimated at £15 million and supplementary provision will be sought from Parliament at the earliest opportunity.
427 "In the meantime recourse will if necessary be made to the Contingencies Fund.
"In order to ensure that the funds attracted by building societies are used to the best advantage, the Building Societies Association has agreed to recommend to its members that the amounts used for special advances of over £13,000 to individual purchasers should be limited as far as possible and that special consideration should be given to first-time purchasers.
"In order to avoid an increase in the total of public expenditure I will make off setting savings from other expenditures for which my Department will be responsible.
"As the House knows, the Government attach overriding importance to the success of its counter-inflation policy.
"They have already demonstrated by their decisions on rates and on the needs allowance for council and private tenants that at this crucial time they are willing, in appropriate cases, to take direct measures to keep increases in household costs within reasonable bounds.
"The present decision on mortgages forms part of the same pattern."
That, my Lords, concludes my right honourable friend's Statement.

§ LORD DIAMOND
My Lords, I am sure that it would be the wish of your Lordships' House first of all to thank the noble Earl for making the Statement and, in particular, for being good enough to add the weight of his important Office to it by making the Statement himself. The Statement refers to the situation which is a stark revelation of the complete failure of Government policy over a wide area. What the noble Earl did not draw attention to was the fact that the lower rate which will now be in vogue is the highest rate ever known in this country for building society mortgages, and will undoubtedly represent a considerable hardship to many a borrower, particularly those who have borrowed recently—younger married couples. Our criticism rests on the fact that this Statement shows no serious attempt at all to deal with the real 428 problem of housing costs, both in terms of capital costs and, more particularly as we are concerned now, with the interest costs.
The Government say in the Statement that they accept that an investment rate of as high as 6.75 per cent.—that is net, it is tax compounded.may well be necessary at the present time. Is the noble Earl aware that the justification of that Statement is that the high rates of borrowing, triggered off by the Government's economic policy, make it essential and show that the Government's credit policy has failed completely in its purpose? Are the Government also aware that a palliative for three months is no solution to our problem at all: it represents in fact one-twentieth of the interest only of that part of the instalment which mortgagors will be called upon to repay over the next three months, and that that is all that is involved? Why the noble Earl refers to that, or why his right honourable friend refers to that, as a "bridging loan", as a "bridging grant", I fail to understand. Is it not simply a bridge between the current rate of 9½ per cent. and the rate that will follow in three months' time under Government policy of 10 per cent.? If the Government feel that 6½75 per cent. is right, why have they made no attempt to insulate the corresponding lending rate from that borrowing rate? Why do they pay no attention whatsoever to proposals, which have been made by right honourable friends of mine in the other place over a period of something like 18 months, for a stabilisation fund which would help in that process of separating the consequential leading to the increased lending rate from an increased borrowing rate?
Finally, may I ask the Government this: Is it not right to say that, whereas this temporary palliative will be no more than a drop in the bucket for most home owners, it at the same time represents a slap in the face for all those council tenants who, far from obtaining any alleviation in their burdens as a result of Government policy, are at this moment being required to pay increased charges?

§ LORD AVEBURY
My Lords, while thanking the noble Earl for his Statement, and while of course welcoming any measure to protect the home owner 429 against ever-increasing interest rates, might I ask whether the noble Earl would not accept that the home owner must be very naīve who does not realise that at the end of the three months his interest rate is going to go up to 10 per cent., when the local elections are safely out of the way? Might I ask him whether this development is not a consequence of the free and untrammelled competition in interest rates?—which is, in my opinion, wholly incompatible with the Government's control over other everyday items of household expenditure. Is it not without precedent for a Government to introduce a panic measure of this kind to subsidise home ownership, which is likely to be noted by millions of council tenants and private tenants who are having to face increases in their cost of living under the Housing Finance Bill? And might it not have been better if the Department had exercised some pressure over the building societies to bring their reserves down to a level which is much closed to the statutory limit, which would have released a great deal more than the £15 million provided under this measure? Could not the situation also have been eased if the Government, through their own resources, had made available more money to the local authorities so that they could have increased their lending to householders at reasonable levels? Moreover, may I ask the noble Earl two specific questions about the Statement? First of all, will he exclude the special advances of above £13,000 from qualification for the bridging grant? Secondly, will he tell the House what are the offsetting savings which the Department is going to make from other expenditures?

EARL JELLICOE
My Lords, I note the remarks with which the noble Lord, Lord Diamond, has prefaced his particular points on general Government credit and monetary policy. I do not wish particularly to duck this, but I do not think it would be right for me to embark on a long discourse on overall Government credit policy and monetary policy. This is a matter which we have debated fairly recently and which we can debate again, and I think that that would be a better vehicle for that discussion than an answer to the particular points put to me by the noble Lord, Lord Diamond. What I must again emphasise is that what the Government have had as a priority in this 430 matter was the need, in the special circumstances which obtain in this field at the present time, to do what was necessary to maintain a steady flow of funds into house construction. That is absolutely necessary if we are going to keep up building at the kind of level which is required, and in our view it is entirely necessary that the level should be kept up. Again, I do not want to get into a housing debate here, but we inherited in this particular area a very low level of "starts". This has now been brought up to a level approximating to that which we bequeathed the last Administration in 1964. For a whole host of reasons, not least social, it is in our view absolutely essential that the flow of funds should be maintained in order to keep "starts" in this area of housing up to an acceptable level.
The noble Lord, Lord Diamond, stigmatised these measures as being a short-term palliative, a drop in the ocean, and so on. I would emphasise to the noble Lord in reply that this is a bridging operation. I recognise that wider considerations are involved here, and that is why my right honourable friends will be discussing urgently with the Building Societies Association whether, and in what form, a longer-term stabilisation scheme could best be implemented. I think the noble Lord also termed these measures as a slap in the face for the council house tenant. All I should like to do is to remind your Lordships' House that the council house tenant, unlike the owner-occupier, does of course benefit from rent rebates. I would remind your Lordships that the cost of rent rebates in the current year are estimated at something like £1C0 million; expenditure on the needs allowance is estimated at something like £30 million, compared with the £15 million which this bridging operation will be absorbing.
In reply to the specific questions of the noble Lord, Lord Avebury, I am not in a position to inform him where the economies which the Secretary of State will be finding within his own Department will precisely fall at this stage; but I can again reaffirm his assurance that the cost of this scheme will be absorbed by economies found from within the Department of the Environment. I wonder whether the noble Lord would repeat his point about £13,000? I am not sure that 431 I know the answer to it and, if so, I apologise in advance, but could he re-phrase his question?

§ LORD AVEBURY
My Lords, what I was asking was whether this assistance of £15 million would be limited to covering the difference in interest rates on loans made to persons borrowing below the special limit of £13,000; and, if the building societies chose to advance additional funds above the special limit, contrary to the advice which has been given to them by the Government, whether that would be excluded from the qualifying terms of this grant.

EARL JELLICOE
My Lords, I give this reply off the cuff and, subject to that, it is my understanding that that is the case; but I do speak subject to correction. If I am wrong on that point I will gladly inform the noble Lord and, if necessary, inform your Lordships' House.

§ LORD ROYLE
My Lords, I suppose I ought to declare an interest in so far as I am a director of a large building society. I should like to thank the noble Earl for his Statement, which I think is a very fair one in all the circumstances. In the course of that Statement he used the term that this was largely owing to "special factors", and he named some of them. But the noble Earl did not name what I regard as the most important of those factors, and that is what has resulted from the Budget.
The building society situation up to the Budget statement was that gross income and withdrawals were keeping on a level, roughly sneaking, of what had existed for quite a long time. Then the Chancellor of the Exchequer discovered that he needed another £4,000 million from somewhere and he did not go to taxation in order to obtain it. What he did was to lift the rate of interest on Government funds, and the result was that the building societies immediately found that there was a very large withdrawal of funds from them, going into Government funds. So the competition came largely from the Government, and the situation which exists now is a direct result of the Budget proposals. Therefore the Government had a very big responsibility on their shoulders during these last few days to do something 432 about it. I place the blame for the fact that building societies found themselves in the situation which they did largely on the Government's policy, or lack of policy. So the situation now is saved by a method which is certainly not the most desirable—and that is an understatement.
I join with the noble Lord, Lord Avebury, in suggesting that there should be some examination of the 1962 Building Societies Act and that the Government should have a look at the present terms of the reserve ratio. It might be that if that were changed there would be more funds available for mortgages. I cannot imagine that it was coincidence that the banks reduced their base rate a few hours before this decision was taken, and it gave the Government an excuse that after all it might well be that interest rates were falling. We shall wait and see. While this situation helps the building societies at the present time I hope it will not be regarded as a permanent way of solving this problem as far as house purchase is concerned.

EARL JELLICOE
My Lords, I will gladly look at the suggestions which have been made by the noble Lord, Lord Avebury, and by the noble Lord, Lord Royle, about the 1962 Act and I will see that those suggestions are conveyed to my right honourable friends who are directly responsible in this particular area. I do not think that I should wish to enter into speculation on the timing of the reduction in the basic lending rate of the clearing banks. I suspect that the noble Lord, Lord Royle, is reading more into this than he should. Nor do I wish to bandy words with him as to what have been the essential immediate factors causing the withdrawal of funds and the slowing down in the increase in net funds available to the building societies in recent weeks. All I would say, from such figures as I have seen, is that they are certainly intimately and closely connected with the funds which have been going into the consumer market in anticipation of V.A.T., but I would not necessarily deny that there are other factors at work. This factor, culminating in a spending spree in the consumer area, and the draw-down in the net increase—if this is not too complicated phraseology—which has taken place in recent weeks, seem to me to be more than coincidental.

§ LORD WIGG
My Lords, whether the funds which have been released in the community stem as a result of the Government's policy in relation to interest rates, or whether they come about as a result of the direct action to get a consumer boom going at breakneck speed, the results in the long run will be the same; but in the meantime, does the noble Earl not agree that the grant to the building societies to keep them in their house-loaning business is in fact a subsidy? This afternoon more than once he has mentioned that this was a subsidy for special cases, but only a few days ago the noble Earl stood at that Box and time and time again refused to treat the hospital workers as a special case. He said there should be no subsidies, no treatment of special cases. What degree of humbug do the Government have to sink to before they start telling the truth, and telling the truth before events force them to?
This week the country has seen an example of political ineptitude which in my knowledge is without parallel. A Government split up the middle, diagonally, vertically and horizontally, leaking its policies in the Press, hoping that something was going to turn up. The truth is that the Government are in an almighty mess. The country will get into an almighty mess as a result of the Government's economic policy, which stems from one basic thing: their determination, regardless of the consequences, that our country as a whole, long or short term, should get into the Common Market. I suppose that this to-day should be regarded as the April instalment. It would have been appropriate if the Government had made the announcement on April 1.

§ BARONESS SUMMERSKILL
My Lords, in view of what the noble Lord, Lord Wigg, has said about the failure of the Government to give the hospital workers ally subsidy, could the noble Earl tell the House why in this case they are giving the building societies £15 million and not loaning it to them?

EARL JELLICOE
My Lords, the judgment here was that the action which was taken was essential if the flow of funds into construction in this area was to be kept going. In fact we are doing precisely what the Leader of the Oppo- 434 sition suggested last year might be done. I could perhaps remind the noble Baroness of what Mr. Wilson said, on October 31, during the debate on the Address: In view of the figures that I have quoted on mortgages, there must be a limit on building society mortgage rates, and this, if necessary, may mean subsidies. The Government should not reject this on the ground of the sanctity of the freedom the City."—[OFFICIAL, REPORT, Commons, 31/10/72; col. 30.] All I can say is that the right honourable gentleman does not seem to share the judgment of the noble Baroness on this particular matter.

§ BARONESS SUMMERSKILL
My Lords, perhaps I know more about it than he does.

EARL JELLICOE
My Lords, we value the wisdom and experience of the noble Baroness that we have seen manifested in a wide variety of fields.
I noted the remarks made by the noble Lord, Lord Wigg; I noted that they went wide in orbit, extending over the Government's pay policy which we have discussed at length, and I was not altogether surprised that the noble Lord managed to drag in the Common Market. But I do not think he asked me a question to which he expected a reply.

§ LORD WIGG
My Lords, will the noble Earl arrange for an early debate so that we may discuss this policy? This is the instalment for April and it will go on, month after month, and at the end we shall see who is right. It is wholly owing—it must be owing—to the Government's policy, regardless of the consequences, to drag this country ultimately into a major deflation, the consequences of which would be quite catastrophic.

EARL JELLICOE
My Lords, I shall be very glad for the usual channels to consider debating this and associated matters, but subject to what we heard from the Chief Whip about the timetable proposed for the Recess and other matters earlier this afternoon.

§ LORD BESWICK
My Lords, is the noble Earl aware that we shall be returning to this Question of interest rates when we discuss the Pay and Prices Code on Monday week? May I ask the noble Earl to what extent the Government went into the question of the working margins of the 435 building societies before they agreed to this subsidy? Is it a fact, as I understand from the figuring, that they will be allowed a working margin of 3 per cent.? Is 3 per cent. not higher than was accepted two or three years ago? Moreover, is it not a percentage on a larger sum of money? Is it more expensive to administer loans of the order of £10,000 than it used to be for loans of the order of £2,000 or £3,000?

EARL JELLICOE
My Lords, I can assure the noble Lord that there were lengthy discussions between my right honourable friends and the representatives of the Building Societies' Association, but it would be wrong for me, again speaking off the cuff, to divulge the nature of those discussions. What I should like to do is to remind the noble Lord, Lord Beswick, that it is now proposed that my right honourable friends should hold further discussions with the Building Societies' Association to see whether, and in what form, a longer-term stabilisation scheme could best be implemented. No doubt the type of consideration which he has advanced is just the type of matter which will be looked into during those further discussions.

§ LORD BESWICK
My Lords, without going into the full nature of those discussions, can the noble Earl tell me at least whether the 3 per cent. working margin is more or less than was the case two or three years ago?

EARL JELLICOE
My Lords, I was hoping that the noble Lord, Lord Davies of Leek, was going to provide the answer to that question which frankly I do not know. I suspect that the noble Lord, Lord Beswick, does know the answer; otherwise I doubt whether he would have asked the question of me. I apologise for not knowing that figure off-hand, as it were, but I will write if need be, to the noble Lord, Lord Beswick, on that point.

§ LORD DAVIES OF LEEK
My Lords, is the noble Earl aware that while there may not appear to be a link with the Statement, to which we have all listened with interest, something should now be done about this terrible, malevolent, avaricious practice of gazumping? Can the Government look into this matter, because it has a pathetic affect upon 436 young married couples? I know it is difficult, but I should like to think that the Government would try, irrespective of this Statement to-day, to prevent gazumping at this period during the scarcity of housing?

EARL JELLICOE
My Lords, that is rather a different matter, but again I shall be glad to convey to my right honourable friend what the noble Lord has said. It is very much with the young married couple in mind that the Government are providing this bridging operation at the present time.

§ LORD WIGG
My Lords, as the noble Earl has called in aid the statement by the Leader of the Opposition—and may I say that I entirely agree with what was said by my noble friend Lady Summerskill, and perhaps I know more about it than she does—may I take it that in due course, in a few weeks' time, when the Government introduce food subsidies, they will again pray in aid the Leader of the Opposition? Would it not be useful, when time after time they are forced by events to accept policies put forward by the Labour Party, for them to preface their Statements by saying just that?

§ LORD DIAMOND
My Lords, that enables me to ask the noble Earl what may be, if it is the wish of the House, the final question on these matters: whether, having regard to the fact that that constructive statement has clearly been taken up by the Government, which we are delighted to hear, the noble Earl will be good enough to keep us informed of the progress made in the Government's deliberations with regard to a stabilisation fund, which is the first sign of the Government's attempt to deal with this problem on a long-term basis—which we very much welcome? Could I, on the grounds of humanity, ask the noble Earl to convey to the Secretary of State my wishes that the arm which is nearly dislocated will shortly be healed?

EARL JELLICOE
My Lords, I will certainly undertake, in so far as the 437 confidentiality of the discussions allows—and that has to be agreed by both sides—to keep your Lordships informed of the progress of these discussions. I should like to emphasise again that both the Government and the Association are agreed that a stabilisation scheme of some sort is desirable to ensure a steadier flow of funds into housing.

§ LORD SHINWELL
My Lords, is it not obvious from the answers which the noble Earl has given and his general demeanour in reply to the questions that have been addressed to him, and the statements that have been made, that he is himself very much disturbed by the situation? In those circumstances, would the noble Earl agree with me that there is not much value in indulging in criticism of the Government? What is important is that what has happened ought not to happen again, and that in the next three months the Government must find a constructive method, in consultation with the building societies, to avoid a repetition of what has happened? Would the noble Earl not agree?

EARL JELLICOE
My Lords, the noble Lord, Lord Shinwell is sometimes right—I correct myself; he is very often right, and I think on this occasion he is plumb right. I am disturbed about this situation. I think it is a serious situation. The action which the Government have taken was right in the circumstances, but I also agree that we have to find, one way and another, a system by which we can get an assured steady flow of funds into this vital sector of our economy, because a great deal depends on it, not least many matters which closely affect millions of individuals in these Islands.