BUILDING SOCIETIES (SPECIAL ADVANCES) (Hansard, 25 May 1971)

§ The Financial Secretary to the Treasury (Mr. Patrick Jenkin)
I beg to move, That the Building Societies (Special Advances) Order 1971, a draft of which was laid before this House on 30th April, be approved. This seems to be one of those days when the Financial Secretary is the bat, the ball and everything else, but that is in the nature of the job.
This Order, if approved, will increase from £10,000 to £13,000 the maximum amount which a building society can advance to an individual without the 297 advance having to become a "special advance" for the purposes of the Building Societies Act 1967. I shall explain briefly what this means. Traditionally, the function of building societies has been to lend money on mortgage to owner-occupiers. In the Building Societies Act, 1960, which was later consolidated, Parliament sought to limit them in the main to this kind of business. The method adopted was to create a class of advances called "special advances", and then to limit the amount of special advances which a society could make in any year. Special advances, are broadly those which fall outside the building societies' traditional rôle. They were denned in the Acts as all advances to companies and advances above a specified limit to individuals.
The limit was originally fixed by the 1960 Act at £5,000, which was then regarded as the normal maximum level advance for an owner-occupier. However, the Act recognised that the limit might need to be revised from time to time, and it included a provision to do this by Order. In 1963 the limit was raised to £7,000, and in 1967 it was put up to its present level of £10,000. The purpose of the present Order is to raise the limit by a further £3,000 to £13,000.
This increase is needed because house prices have continued to rise since 1967. Speaking generally, if £10,000 was the right level in 1967, a figure below £13,000 would probably be right today. In 1967 the House thought it right to make some allowance for further increases so that it would not be necessary to come back for a fresh Order at too frequent intervals.
The Building Societies Association has suggested that we ought to raise the figure to £15,000, but the Government have concluded that £13,000 would be the more appropriate figure. If we go too high, we could be appearing to encourage building societies to go beyond their traditional rôle as envisaged in 1960, and this could be to the disadvantage of the smaller borrower. For this reason we feel that £13,000 is the correct figure. I invite the House to approve the Order.

§ Mr. Joel Barnett (Heywood and Royton)
Again, I do not think we need to detain the House long. Clearly, there 298 is need for some increase because of the inflation which has occurred since 1967. I note what was said by the Financial Secretary about the fact that £13,000 is slightly more than the total inflation on a £10,000 house since 1967. It would be interesting to know how much below the £13,000 is the true figure of inflation since 1967. It would also be interesting to know how long he expects the present trend envisaging a figure of £13,000 to continue. However, I do not expect a precise answer tonight. I would be grateful if the hon. Gentleman would consider the matter. It would be interesting to know where the £13,000 stands in the scale of house purchase; in other words, what percentage of total house sales it would represent. I agree that it is vital that the majority of building society funds should be available for the lower-priced houses and for the smaller owner-occupier.
I am always interested, as I am sure are my constituents in the North-West, to read in the newspapers about the average price of houses for sale being in the region of £5,000 to £6,000. In the North-West the average selling price of a house is more like £4.000. Although there is no problem at the moment since building societies have plenty of funds, I can foresee possible difficulties, perhaps in the not too distant future, if the recent Bank of England proposals are implemented and there is growing competition for funds, with the possibility of building societies finding themselves in a slightly less happy position than is the case today. In those circumstances, it may well be necessary to look at the matter again. It would be bad if the building societies were to lend too high a proportion of their funds for the more expensive houses at around the £13,000 mark, leaving insufficient funds available for those at the lower end of the house purchase scale.
I ask the Financial Secretary to bear in mind that there may well be a need to restrict building society lending, both under the new special advances rate and at the higher level, if the competition which may now take place in banking leads to a shortage of funds in the hands of the building societies. A close watch also should be kept on the percentage of funds lent by building societies in special advances. According to one noble Lord 299 when this matter was debated in another place, in 1968 just over 2 per cent. of building society funds were in that category. To raise the limit now might mean a higher proportion of special advances and this may apply to a greater proportion of the funds in the hands of the smaller building societies. This may not have quite such a marked effect on the large building societies, but it could certainly have an effect on the smaller ones. Therefore, it may be necessary at some time to consider a differential between the smaller and the large building societies.
I have no objection to the raising of the limit since it is necessary because of inflation, but I hope that the Government will keep this matter under close review. If in future there is a shortage of building society funds, I hope that the Government will be sure to come back to the House quickly to ensure that there is no shortage of funds for the people at the lower end of the scale whom we wish to see helped.

§ Mr. Patrick Jenkin
If I may be allowed to reply to the hon. Member, I am reluctant to become involved in a detailed discussion about the level of house prices. There are a number of indices which vary widely in their application to different parts of the country. What may seem appropriate in Heywood and Royton would seem to be a prize beyond the wildest dreams in my constituency, where houses change hands at what a few years ago would have been regarded as ridiculously high prices. I am advised that the right level to be set would be somewhere below £13,000. I am grateful for the hon. Gentleman's acknowledgement that this is a reasonable figure.
The lending policy of the building societies must be for them. I entirely take the hon. Gentleman's point about the need to keep a watch on the availability of funds for the traditional type of lending for the small buyer.
The hon. Gentleman mentioned the Bank of England paper, "Competition and Credit Control", and suggested that it might have some effect on limiting the flow of funds to the building societies. I draw his attention, although I feel sure 300 that he is aware of it, to what was said in that paper: The impact of such competition on. building societies would need careful consideration and the Bank of England would wish to discuss this matter with the banks. It might be that a need would be recognised, for example, to observe some limits on the terms offered for savings deposits. I hope that that will indicate that the authorities are aware of and will bear in mind the point which he made.
I cannot give the hon. Gentleman the latest figures on the amount of special advances. Most of the major building societies have a natural reluctance to make special advances and recognise the duty imposed upon them by Parliament in the 1962 Act to engage primarily in their traditional lending. We shall certainly keep this point under review. If a change is necessary we shall no doubt make proposals to the House.
I am grateful to the hon. Gentleman for his welcome of the Order, and I hope that it may be approved.

§ Mr. R. A. McCrindle (Billericay)
This brief contribution is, first, to approve the Order and, secondly, to question whether the figure of £13,000 is adequate in 1971.
I speak with some professional experience as a mortgage broker. I should point out to the hon. Member for Heywood and Royton (Mr. Barnett) that my experience as a mortgage broker is not only in the South-East but in his part of the country as well.
I accept that the average price of houses both in his part of the country and in London is considerably below £13,000, but I hope that he will accept that there are many applications for mortgages well in advance of that figure. While £13,000 is, on balance, a reasonably adequate figure at the moment, I question whether this continuing approach is necessary.
The requirement for this type of Order to be placed before the House springs from the Building Societies Act, 1961. It was perfectly proper, in the aftermath of some difficulties attending one building society in particular, that the public should be reassured. However, I quesion whether the usefulness of this practice has not started to outlive itself, to some extent, and that this should be the last 301 such Order to be placed before the House and the practice abolished. In many ways, by having to approve such Orders in Parliament, we are interfering with the commercial judgment of building societies. We shall constantly have to come back and present Orders for ever rising figures unless we are supreme optimists and feel that inflation of house prices will suddenly stop.
I felt that I should make this brief intervention because only the building societies have this restriction placed on their commercial judgment. I accept that this may be proper, because they are traditionally the lenders to low-price house purchasers. If an application is made to a building society at the moment for an advance of £13,000, special approval is required. But a man has only to go to an insurance company and no particular requirement or approval has to be obtained.

§ Mr. Barnett
It is not only the fact that they are lending to house purchasers, as I am sure the hon. Gentleman will agree; it is also the fact that they are borrowing from small borrowers who have to be protected, as we have seen in the past.

§ Mr. McCrindle
I accept that that was largely what led to the requirements being introduced. But I suppose that small shareholders in insurance companies could be brought into the same category.
My point is that, even accepting what the hon. Gentleman said, we are interfering with the commercial judgment of the building societies, and only the building societies. If, as I think the hon. Gentleman predicted, we are going to move into a period where possibly house purchase lending will be forthcoming from finance houses, and even the banks., I wonder where the interference with commercial judgment will stop.
I felt that I should make this intervention because, while I approve of the uplifting of the limit to £13,000, I wondered whether the Government would be well advised to consider the correctness of changing the necessity to continue presenting such Orders to Parliament.