BUILDING SOCIETIES' PROBLEMS

HL Deb 23 January 1974 vol 348 cc1525-68

7.7 p.m.

THE EARL OF KINNOULL rose to ask Her Majesty's Government what they propose to do about the problems confronting the building societies. The noble Earl said: My Lords, I believe I should start by thanking my noble friend Lord Ferrier for his quite remarkable punctuality in finishing his fascinating debate. My Lords, in rising to put the Question on building societies, I should like at the outset to declare an interest in being associated with one particular society, in fact, the 38th society in size. I would add quickly that that society holds no responsibility for anything I am about to say.

My Lords, I begin somewhat in trepidation for, as is usual in this House, there are many other noble Lords who have a far greater experience and knowledge than myself of this subject I should like to take this opportunity, as I shall not have one later, to thank all those noble Lords who have indicated that they wish to take part, and to thank them particularly for being here at this relatively late hour. I am sure their views will enhance the value of what I hope will be an instructive debate.

The House will recall that the building society movement was born over 200 years ago for the express social objective of making it possible for more and more people to own their own homes. In fact, the earliest society that I have been able to trace was the Land Buyers' Society which operated in Norfolk in 1640. The rates of interest that society then charged, I regret, were not recorded. I suspect they were a little different from those of to-day. From the quiet and uncontroversial waters of the 17th and 18th centuries, the movement has matured into a major influential factor in the national housing programme. Not surprisingly, we find that it is now subjected from time to time to an often critical glare of publicity. But the record of the movement, of its social achievement over the last 50 years, I believe stands proud and high.

My Lords, if we look at the figures in 1914, we see that only 10 per cent. of the families in Britain owned their own homes. By 1944, that figure had risen to 25 per cent. By 1973, last year, the figure stood at over 51 per cent., the highest percentage of any European country. Since building societies are responsible for over 90 per cent. of home mortgages, few, I think, could argue that the movement, with its strongly held social objective, has not been an outstanding success. On the other side of the coin, the building societies have been able to make such a major contribution to home ownership only by attracting an ever-increasing amount of savings and investments into the movement.

The keystone of their success in this field I believe could be summed up in two words: public confidence. Anyone who has savings to invest would, I am sure, agree that the building societies are closely identified as the haven of security and safety. The fact that they also offer a service of easy withdrawal, of competitive rates of interest, and, above all, no management charge, is why in the past the movement, by its astute management, has been so successful in attracting funds. Again, if we look at figures we see that to-day 14 million investors have over £17,000 million savings with building societies, and whatever temptations political Parties may have in the future—and I have in mind of course the threats of nationalisation—I hope it is recognised that it would be a grossly irresponsible act were anything ever done by politicians to impair that high degree of public confidence that building societies enjoy.

The purpose of my Question to-night was not solely to eulogise on building societies and all those involved in the movement. Their splendid record, as I have tried to indicate, speaks for itself. My purpose to-night is more to probe the Government and my noble friend on how the Government see their responsibility towards the immediate problems facing building societies, and how they intend to equip the movement to meet the challenge over the next fifty years so that it can continue to be an effective force and to play as effective a part as it has done over the last fifty years.

What are the problems facing building societies at the present? They fall, I believe, clearly into two parts: the short-term problems and those of the long term. In the short term, it is no secret that building societies are faced to-day with an acute difficulty of attracting funds and investment into the movement, which is a complete reversal of the situation of some two years ago when there was a glut. The reason for this is the simple commercial fact that the money market has become fiercely competitive and very expensive. Building societies appear to be faced now with two clear choices: either to do nothing, to batten down the hatches and reduce lending to a trickle until the money market eases, or to raise yet again the mortgage interest rates in order to be in a position to attract funds to lend. The consequence of the first choice—to do nothing—is crystal clear. It would be that in a relatively short time, unless the money market improves, considerable damage would be done to the housing programme, which would no doubt lead to a serious recession. Indeed, the new house building industry, we know, is already suffering acutely. The consequence of the second choice—to raise mortgages yet again—would I believe be socially unacceptable and would do the movement immeasurable harm.

What can the Government do to help building societies over this dilemma, and where do they see their responsibilities? This is the kind of question which I hope my noble friend has come here to-night ready to answer. We know that the Government are watching the situation most carefully through the new Joint Advisory Committee, which was set up only some two or three months ago. I am sure that all in building societies greatly welcome this new channel of communication between Government and the building societies movement. But I hope that to-night my noble friend will be able to go further than to say: "We are watching the situation carefully"; I hone he will be able to say: "We are examining the measures that should be taken to safeguard the housing programme."

What measures can the Government take in the short term? There are a host of alternatives and I propose to suggest to my noble friend just three possible courses, all of which I hope are practicable. The first would be to put a curb on the very free rein on local authorities which at present go out to attract the funds. I have in mind a minimum capital sum, similar to that which the joint stock banks have to observe to-day, below which the local authorities could not invite a rate of 13 per cent. to 14 per cent., as they do at the moment. Local authorities have in recent months become perhaps the most serious direct competitor to building societies in attracting savings. Such a curb would, I believe, assist building societies without seriously damaging local authorities' ability to raise money.

My second suggestion to my noble friend would be the early implementation of the low-start mortgage for first-time buyers. It is a matter which I know the Government are actively pursuing; and again I hope that my noble friend will be able to say something to-night about the progress that is being made. I hope that such a scheme could incorporate the setting up of a substantial Government fund—say, £100 million—at a low interest, which building societies could partly draw on when offering the low-start mortgage; and so long as the scheme was limited to a capital ceiling and to first purchasers only, it would, I believe, greatly assist many young couples who must look with despair at the prospect of owning their own home at the present time. The argument that a low-interest Government fund would be a subsidy, and, "Why should this particular section of house buyers be singled out?" is no longer, I believe, in the present climate, sound. I recognise that other noble Lords may disagree with me. There are already a number of precedents of direct and indirect subsidies on house buyers.

If we take, for instance, the Kingston Borough Council, we see that at the moment they are borrowing at something like between 13 to 14 per cent., yet they are able to offer house mortgages at 8½ per cent. in order to attract labour to that area. Again, if we look at the option mortgage scheme, we find that this has a direct element of subsidy; and if we look at the income tax relief on ordinary mortgages we see that there is an indirect element of subsidy. I do not believe that anyone would begrudge young couples today participating, perhaps for a limited period of time, in a low-start mortgage which has, or would have, an element of subsidy.

The third suggestion I should like to put to my noble friend is that the Government should raise the present ceiling on the 100 per cent. option mortgage scheme to £10,000. My noble friend will recall that this point was raised before, and the figures showed then, and still do to-day, that the greatest need for this is in the London area. Perhaps my noble friend could say whether the Joint Advisory Committee are considering this matter at the moment.

To turn briefly to the long-term problems of building societies, we know that the Joint Advisory Committe are at present examining what can be done to ensure a steady flow of funds into building societies. I wish them luck, for it is no secret that this matter has eluded building societies for over a hundred years. There are other long-term problems which I very much hope the Advisory Committee are examining. Is it the intention, for example, to allow building societies to compete in the Common Market? I hope it is. Is the 1964 Building Societies Act now too restrictive on the limits within which building societies can conduct their business? I believe it is. Surely there is a case to-day for giving building societies much wider powers of investment than just gilt-edged and local authority securities. Why should they not be allowed to invest a proportion of their funds in property and land? Would this not allow them to make a far greater contribution to, say, urban renewal schemes? I believe it would. Is it not time that the building societies were allowed to accept more than £10,000 from any one shareholder? Should the societies now be considering offering joint equity mortgages which could perhaps reduce the rate of mortgage interest? I know that this suggestion is being considered by the Association at the moment and I understand that it will need a change in legislation.

My Lords, it is questions like these that I hope the Joint Advisory Committee are examining for the long-term good of building societies, and I hope that when my noble friend comes to reply he will be able to say when the Joint Advisory Committee report will be published, what the Committee are discussing and what conclusions they are reaching. It would be reassuring if my noble friend could say, among other things, that all these matters are under review and that amending legislation is also under review. Over the last 12 months the Government have politely but firmly been urging building societies to show more imagination in their affairs. The Press have been a great deal ruder and considerably less well-informed. I believe that building societies would be happy to respond to the Government's challenge, but they are hamstrung until they are allowed a greater flexibility.

Finally, my Lords, I would say to my noble friend that in asking this Question to-night against a background of economic gloom, I recognise that my noble friend may be tempted to say that the problem of building societies is but a white speck in a clear blue sky compared to the storm clouds that are gathering over Whitehall. I am sure that that will not be his answer, however, because I am confident that both he and the Government realise that if building societies are told to go off into the wilderness until better conditions prevail, that will be a body blow to the whole of the housing programme. The purpose of my Question is to give my noble friend an opportunity to assure us to-night that the Government are aware of, and are taking all steps within their power to correct, the present unsatisfactory position.

7.22 p.m.

LORD JACQUES

My Lords, may I first congratulate the noble Earl, Lord Kinnoull, on having put down this Question and got time for its debate. It is a most timely debate. On looking down the list of speakers, I note that my noble friend Lord Royle, is to speak. It is, I understand, his 78th birthday to-day and I know that when I congratulate him and say that we will hope he will be in his place for many years to come, I will be speaking on behalf of noble Lords on all sides of the House. For the next few minutes I am going to take a good, hard look at building societies. I notice also that I am to be followed by noble Lords on all sides who have a great deal of experience in this field—far more than I have. I hope that they will find that I have been sympathetic and constructive, if indeed a little critical.

Building societies are one of the several kinds of mutual societies that developed mainly in the last century. I believe they were a reaction to laissez-faire capitalism. Those mutual societies, including building societies, were generally based on a small community and were formed for serving that community. They were generally confined and inward-looking but they nevertheless gave an excellent service to the community which formed them. Some of them were building societies in the literal sense of the term in that they were formed for the purpose of building houses for their members. They grew very rapidly and the peak was reached in 1890 when there were 3,500 on the Register. But by the turn of the century it was down to 2,300; by 1920 it was 1,300; in 1940 it was under 1,000; and to-day there are 450 building societies. But it is worthy of note that while the number of building societies on the Register has been declining, the number of housing societies and housing associations which are taking over some of the original purposes of building societies have been greatly increasing, and at the present time housing societies and housing associations are the most numerous of the mutual societies on the Register. There are now 3,900 housing societies and associations on the Register.

Of the 450 building societies, 50 do no business at all, or very little business, so we can forget those. Of the other 400, 300 are local or regional societies but they frequently compete with each other in the same community or region. The remaining 100 are either national building societies or have aspirations to become national. But while this great decline in the numbers of building societies has been going on, there has been a considerable increase in the number of building society branches. That increase has been most rapid in recent years. In the last five years the number of branches of building societies has increased by 50 per cent. I venture to say that there have been occasions when rapid growth has sometimes been at the expense of stability.

Present day building societies are concerned almost exclusively with the finance of house purchase. They have three features in common: first, they are nonprofit making, and I think that is why I have great sympathy with them; secondly, they borrow short and lend long. That is a great risk. It involves considerable techniques. It is in my experience comparatively easy when your capital is increasing but not so easy when your capital is declining. It certainly involves the keeping of substantial funds of liquid or semi-liquid capital which of course reduces income. But, above all, it means that you have to generate a very high degree of public confidence. Thirdly, the present-day building societies have one unique feature, in that their members have a conflict of interest. The people who subscribe the money want a good rate, or at least the market rate, while the people who borrow the money want the lowest rate they can get. There is, therefore, a sheer conflict, but that conflict has considerable advantages. It is one of the principal spurs to efficiency within the building society movement and it makes the building society somewhat unique compared with some of the other mutual societies.

All mutual societies, and particularly those which have to generate a high degree of public confidence, have to learn and inwardly digest two great lessons of history. The first is that the fortunes or misfortunes of one single society in their movement can strongly influence the public confidence in all their societies. That being so, it means that the societies are bound together. They have a great deal in common; their future depends upon each other. In such circumstances, there is a very strong need for national organisation and for strong leadership and a measure of discipline within the movement. That applies to all mutual societies that depend upon public confidence, not only building societies but also co-operative societies.

The second important lesson of history which these mutual societies have to learn and inwardly digest is that the only organisation which survives in the long run and which continues to prosper is the organisation which is capable of adapting its organisation and its policies to the ever-changing circumstances of the time. Those which cannot change to meet the changing circumstances eventually become merely something in our history books. I believe that wise leadership within the building society movement would at the present time concentrate on three major issues. The first is amalgamation. Amalgamation of building societies is necessary for three chief reasons: first, to facilitate the recruitment of quality staff and to attain that specialisation of management which contributes to efficiency; secondly, to make better use of assets, particularly of branches, and to facilitate the adoption of the most sophisticated methods of accounting; and, thirdly, to rationalise and economise in advertising.

I believe that the building society movement should have a plan of amalgamation which would at least lay down the guidelines and also set the targets. Here I would commend them to the national plan of the co-operative movement which was adopted in 1968. That plan has had a considerable effect in laying down guidelines and getting not merely amalgamation but rational and sensible amalgamation. I would hope that the lessons on amalgamation which have been learned in the co-operative movement in the last few years would be of benefit to the building societies.

Parliament can help a little in this matter. At the present time the legal process for amalgamation and transfers of engagement is far too cumbersome. Let us take amalgamation. First, you have to get the prior approval of the Registrar; secondly, you have to get a special resolution passed by three-quarters of the members voting either in person or by proxy; thirdly, you have to get the written consent of the holders of two-thirds of the shares, unless this is excused by the Registrar; fourthly, you have to put a notice in the Gazette so that anybody who wants to object can do so. This is far too cumbersome and is years out of date. For years co-operative societies have been able to amalgamate by a resolution of two-thirds of the members present and voting or voting by proxy. It is time that we changed the laws relating to building societies so that they may amalgamate in the same way as co-operative societies.

Similarly, in the case of transfers of engagement, a simple resolution of two-thirds should be sufficient on the part of the transferor society, and in the case of the transferee society a motion by the board of the society which is receiving should be sufficient. By this simplification we can greatly help amalgamation. At the same time as building societies are proceeding to amalgamation power should be given to the Registrar to give consent to the opening of branches. That would provide the kind of economy which is necessary in the building society movement.

The second question of policy to which I think attention should be given is that of capital reconstruction. I do not accept the general view which is sometimes put forward that there is a need for a stable rate of interest in the mortgage field. A stable rate of interest in this field is not a practical proposition. The mortgagor has the sacred right of redemption, and so long as this situation applies the rate of interest cannot be too far divorced from the market rate. If it was above the market rate the mortgagor could redeem and get a mortgage elsewhere. So it is not possible to have completely stable rates; but it is possible to have rates which are more stable than those which we have at the present time. I believe that too much importance is attached to the withdrawability of capital, and that the whole building society movement—not just one or two societies—should very gradually change its capital construction so that it has withdraw-able capital, capital which is medium term and capital which is long term. This can only be done by making changes at points in time when rates of interest are being changed anyway. On those occasions the building societies should gradually build up those three forms of capital so that they have capital which is withdrawable on demand, capital which is for, say, three years and subject to three months' notice thereafter, and capital which is for six years and subject to six months' notice thereafter. That should be the general objective, but you can only get there slowly. I believe that would give a little more stability and would relieve the building societies of unnecessary risk.

The third necessity, I think, is for the building societies to try to ease the burden on the borrower. I am not one of those who think that the rate of interest is the great burden on the borrower. I believe that the majority of people who have bought houses in the post-war period have been able to get the money at a negative rate of interest because the tax rebate and the rate of inflation together have exceeded the rate of interest which the mortgagor has paid to the building society. Even at the present rate of 11 per cent. you have tax at the rate of 7.7 per cent. which means that if inflation is at the rate of 7¾ per cent. or more there is a negative rate of interest.

I think the genuine grouse of the mortgagor is not so much the rate of interest as the system of repayment. Originally, building society repayments were made in declining amounts; the mortgagor paid interest on the amount of capital plus a fixed contribution of the capital. Since the capital was greater in the beginning and was gradually declining, the amount paid by the mortgagor for interest and capital was gradually declining. The building societies put that right mainly between the wars when they generally adopted a fixed instalment system. That fixed instalment system was adopted deliberately to help the mortgagor, so that he had a fixed amount to pay which covered both interest and capital and was a fairly constant ratio of his money income throughout the year. Most societies continue the fixed instalment system. That system is out of date. In an inflationary economy like ours, if the payment which has to be made annually by the mortgagor is to bear a consistent relation to his money income over the period then it has to be an increasing amount. I believe that more attention has to be paid to the system of repayments than has been given to it hitherto.

I realise that there are limitations. These are that the average mortgage is for only seven or eight years anyway, and consequently with a figure which was increasing most mortgagors would be on the lower amount and in a very short time would be giving up their mortgage before they came to the higher amounts. I do not think that that is important in an era of inflation. But I am one for simplicity, and I believe that any scheme of an increasing instalment should be on a simple basis, not merely because it is simple but also because it is likely to get over the difficult tax question. I would suggest that every young couple who go to a building society for a mortgage and are entering the house-purchase market for the first time, should have the option of getting a mortgage whereby in the first three years they paid nothing but interest, and thereafter they paid an increasing contribution to the capital so that over the whole period of time the amount they paid to the building society tended to bear a constant ratio to their increasing money income. I believe that more attention has to be paid to this aspect.

One final point. I have grave doubts whether this is the time for giving a subsidy to house purchasers. Surely we cannot call upon a Government who ate increasing rents to tenants in council houses at the same time to give a subsidy to those who are purchasing houses. I think this would be inconsistent and would be open to the strongest possible criticism.

THE EARL OF KINNOULL

My Lords, before the noble Lord sits down, may I ask him whether it would not be fair to say that the fair rents system will itself be subject to subsidies?

LORD JACQUES

My Lords, before we had the fair rents system my own view was—and the figures supported it—that the subsidy which was given to the house purchaser by the tax rebate was far greater than the subsidy given to the council house tenant. Since fair rents have come in, and since rents have been increased, then the house purchaser must be getting a subsidy which is even greater than the council house tenant. Therefore it would be wrong to increase the subsidy to the house purchaser.

VISCOUNT RIDLEY

My Lords, before the noble Lord sits down I should like to say that I found his argument extremely convincing; but has he not forgotten the rents rebate side of the fair rents system?

LORD JACQUES

My Lords, I did not forget the rents rebate side; but I would admit that that is a factor to be taken into account.

7.41 p.m.

Loan HILL OF LUTON

My Lords, I really must apologise for intervening twice on the same day, but it so happens that the issues involved in these two debates are ones in which I am intensely interested and, like other noble Lords, I am grateful to the noble Earl, Lord Kinnoull, for raising this matter in his Unstarred Question. I am grateful, too, to the noble Lord, Lord Jacques, for the speech that he has just made, showing a wide and deep knowledge of the problems of the movement, and problems to which the movement must devote their mind. He will forgive me if I do not follow him because I want to speak more particularly about the urgency of the present problems, without in any way minimising the severity of the more general problems that lie ahead, some of which he has dealt with in his very valuable speech.

This is really a housing debate. It is essentially that, because, after all, the widespread demand of the people of this country shown over the years for home ownership—and this debate is about home ownership and the possibilities of its further growth—the building societies have made possible this astonishing growth to which both noble Lords who preceded me have referred. The figure to-day of the houses in this country which are owner occupied is 52 per cent. That indeed is an indication, whatever may be the political background, of this urge for home ownership and, let us get it clear from the outset, it is the building societies which have made that possible.

But what is the priority? I ask the noble Lord who is to reply to the debate: what is the priority of home ownership in the minds of the Government to-day? What can they do to facilitate home ownership at this time of difficulty? To put the question in another form, can they allow the level of building starts to continue to decline without giving their minds to the question of the priority of this form of social and human develop- ment? These are really the basic issues which this debate raises. Naturally the problems should be seen against the experience of the building societies last year. Yesterday the Building Societies Association gave the figures for the year. For myself, I find it easier to contemplate the returns of an individual building society with which I am associated and in which I must declare an interest. It is the second largest building society, the Abbey National, with assets standing at over £2,500 million and with 2,250 million investors. At first sight last year's results looked good, with gross receipts from investors of over £1,000 million, but the figure of £690 million was withdrawn. There were 77,000 mortgages completed (and incidentally only 1,500 of these were in excess of £13,000), but because of the increase in the price of houses that number of mortgages was 20 per cent. less than the previous year. Roughly the same amount of money was lent, but there was a 20 per cent. drop in the number of beneficiaries. Putting it another way, the average amount advanced increased by 22 per cent. from £5,430 to £6,640.

Incidentally, it is important to make certain other things clear. Over one-fifth of those advances—and this will apply to the movement generally—were on pre 1919 houses; one half of the borrowers were buying a house for the first time; one in five of the first-time purchasers were under 25 years of age; and over two-thirds were under 35. Taken as a whole, this picture looks good but it conceals some very real problems. Towards the end of the year the net income from investors fell and there were phases, although they were short, when the amount of money going out was almost as much as the amount coming in. Mind you, let us recall that there is repayment money as well. That is an important factor: in the case of Abbey National £400 million a year is to be considered in relation to these figures.

As your Lordships will know, the 7½ per cent. which the building societies offer, for the man paying tax at 30 per cent. is 10.7 per cent., but we cannot compare with some of the rates being offered to-day: local authorities, 12 to 14 per cent. in comparison with our 10.7 per cent. The banks, for sums over £10,000 are offering 12, 13 and 14 per cent. The margin is wide and unbridgeable in present conditions. The competition for short-term money is very severe. I do not want to exaggerate, for it is still true that a large number of people regard the building society as the soundest, safest place for their money, but the effect of competition is intensive in terms of the money that can become available to borrowers.

So what are the problems? Sticking to the example of Abbey National, £153 million more came in last year and £153 million more went out. The money was more mobile. If we look at the gross intake the position is not so bad but it is in the net intake that we find the worry. It is the higher level of withdrawals plus a fall in gross intake which presents the fundamental problem to-day. Of course, the building societies have encouraged ready withdrawals—that is one of their strengths—to their customers and, unlike the banks, they are open on Saturday mornings. But the problem is how to attract more money and, in greater part, how to retain a bigger proportion of the money which they attract? How to compete with the banks; how to compete with local authorities?

What can the Government do? The noble Earl, Lord Kinnoull, has referred to some possibilities. The option mortgage scheme now provides for those who opt for subsidy as from January 1, of 3.25 per cent. That figure might be raised but it would increase demand without increasing the total amount of money available for mortgages. As the noble Earl said, there is a scheme between the Government and the insurance companies to assist borrowers under the option mortgage scheme to obtain up to 100 per cent. provided the value of the house to be purchased does not exceed £7,500 the amount could be raised. The schemes to be worked out for reducing interest in the first five years for the first-time buyer—well, it may help. It will help some but possibly not others. I suppose in modern conditions it is the second five years, when mother gives up work and the children are arriving, that is likely to be the period of greatest strain. There are other schemes to which reference has already been made. But in a position in which the building societies cannot effectively compete, what are the steps to be taken? What are the choices?

Let us face the fact that one step is the raising of interest rates by building societies. It is a terrible thought, and nobody wants to do it, but if general interest rates remain at their present level and there is no Government action possible or taken, this rise is inevitable if mortgage money is to remain available in reasonable quantities. If one considers the effect of a mortgage famine on the whole building situation, it seems we are presented with a choice between evils. I suppose the competition of others could be weakened. The freedom given to the banks in the Memorandum of Competition and Credit may have been relevant at the time it was done, but I gravely doubt whether it is relevant to-day. I know it has been modified to the extent that the banks are asked not to pay more than 9½ per cent. on loans up to £10,000, but there are important investors in building societies, such as married couples, who have an investment between £10,000 and £20,000. I saw it suggested in the Financial Times this morning that banks ought to be required to lend to building societies at a reduced rate, so reducing their abnormal, indeed high profits to-day. Should the Government repeat what they did in 1959 and make money available at the going rate, although inevitably a subsidised rate, to building societies? I do not much like the idea, but it may be inevitable. It has been done before when it was linked to loans on pre-1919 houses. So I suppose it could be linked to first-time purchasers, thus not only accommodating their needs but releasing money for mortgages generally. It is a possibility. Another suggestion was made of a tax modification that removed the advantage of managed bonds which is largely, I believe, an advantage arising out of their tax position. We must be careful not to leap, as we tended to do last year, into swift, ill-considered arrangements. The £15 million was a waste of money, even if it is hindsight that gives the better view; let us admit it. The stabilisation fund based on an allegation that building societies were overlending, the idea being that some of it should be held back for the future, whatever its merits has no relevance to the position to-day. The fact is, I suppose, that basically our problems arise from the inflationary position in this country and the abnormally high level of interest rates. No permanent solution will be found until that problem is dealt with, until the gap between what we can offer and what can be got elsewhere has been bridged.

My Lords, it may be that some of these ideas, or perhaps others, could have some effect. But in this debate we ought to make clear one thing, because it is not sufficiently appreciated elsewhere, and that is that the record of building societies in this country is excellent by any standards. I agree with the noble Lord, Lord Jacques, that that does not mean to say they need not look at themselves, their role and organisation. But their record is superb. No other agency could do the job for which, with their experience and expertise, they are superbly equipped to do. I am not now entering the realms of Party politics or the future. As matters stand, there is no organisation which could do this job with anything like the same efficiency as the building societies do it. There is no doubt that the important factor in security and happiness is the ownership by people of their homes. Incidentally, where else could one borrow at 11 per cent.; or for the ordinary man, 7.7 per cent., which is what it means for so many ordinary men paying 30 per cent, tax? It seems to me that the fundamental question is what role has home ownership in the priorities of the Government? I ask for this reason. A shortage of mortgage money means something more than hardship to the would-be borrower. It means a fall in the number of building starts; an absence of confidence on the part of the builders. We all regret it, but it is a fact of human life, of human nature. Neglect this present position, accept a mortgage famine, and it should be recognised that one accepts at the same time such a further decline in the number of building starts as to affect the building achievement in this country for two or three years ahead.

So I ask the Government not to look at this in terms of the interest of these non-profit making bodies, building societies, but to accept that only building societies can do this job; that in present circumstances the competition is unfairly severe, and that as matters stand the building societies cannot meet it. If something is not done, there will be a state of decline in confidence in the building industry, and the whole housing policy and housing achievement will suffer. This is a housing question to which the Government should apply their mind, asking themselves not whether this is a matter of a subsidy for this man as against that, but whether it is a matter of securing a steady improvement in the housing conditions of this country, including the opportunity for a man to buy his own house.

7.48 p.m.

LORD WADE

My Lords, we are indebted to the noble Earl, Lord Kinnoull, for asking this Question, and for raising this important and topical issue. Like the noble Lord, Lord Hill, I have an interest to declare, in that I am a director of a building society. But I think everyone taking part in this debate is primarily concerned with the facilitating of home ownership, with the problems of home buyers, and with the problems of those who build our houses, as the noble Lord, Lord Hill, pointed out so emphatically.

A good many years ago, when I was in another place, there was a series of debates on the taxation of building societies. There were a number of anomalies, and these gave rise to some wide-ranging debates in which I took a fairly active part. It never occurred to me then that some day I should be a director of a building society. But what did strike me at the time was the degree of misunderstanding and ignorance among the general public and, I regret to say, among some Members of Parliament, as to the way in which building societies operate. For example, it was not everyone who fully appreciated the fact that there are no ordinary shareholders in building societies. There is no one to whom profits can be distributed, if made. Any margin of profit, after putting the proper amount to reserves and paying tax to the Government, is devoted to keeping down interest rates to the home buyer.

I accept what the noble Lord, Lord Jacques, has said: that the building societies perform a dual service; they accept savings on short term, the lenders being free to take out their money whenever they wish, and they make loans on long term. Building societies are sometimes criticised for this, but I believe that that is a service which the building society movement is expected to provide and, I think, in the main will continue to provide. The problem, of course, is how to cushion the home buyer from excessively high interest rates, on the one hand, and from mortgage rationing, on the other; and it is not an easy task.

Another misunderstanding I have found arises from the accusation that when funds are plentiful building societies by their lending policy, cause house prices to rise. I am not sure that that is altogether fair. I have never found people going round saying that the building societies are lending too much—in fact, rather the reverse. I find people saying that smaller deposits should be required from the home buyer to put down, with 100 per cent. mortgages and other inducements to encourage home ownership. But even without that, the demand exists; and the main function of the building society is to try to meet that demand, subject, of course, to their taking all reasonable precautions. I would agree with Lord Jacques that the whole subject should be considered by the building societies very carefully. They require to study, in particular, how to achieve a greater evenness of flow of funds into and out of the societies. I trust that that is one of the subjects being considered by the Joint Committee.

But the immediate problem, the one which Lord Hill has just stressed, is how to facilitate the flow of funds into the building society movement at the present time: whether there is anything the Government should or could do. And this is extremely important for the building industry as well as for the home buyer. When I come to put my own suggestions as to what the Government should do, I am perhaps a little more radical than the noble Earl and perhaps a little more controversial. I think there are three choices. First, the Government could inject money into the building society movement. The Government could inject money for some specific purpose—for example, to assist first-time home buyers. I am not myself very keen on the concept of subsidising the building societies, but if it has to be done at all I believe that any subsidy, if it is to achieve the object desired, will have to be substantial.

The second course would be for the Government to say to the societies, "We are aware that it is essential that the building societies should be absolutely sound"—as indeed they are— "and for this reason they must have adequate liquid assets and must have adequate reserves. But under these exceptional circumstances to-day, the Government will do whatever is necessary, with the consent of the Registrar of Building Societies, to authorise building societies to use some of their liquid assets and draw on their reserves." In return, the Government would make available Government guarantees; and, furthermore, if it was necessary for the building societies to sell their investments at a loss, the Government would pay them compensation for doing so. All this, my Lords, would be for the specific purpose of enabling more mortgage loans to be made available to would-be home buyers. No doubt when funds become more plentiful, the status quo could be restored and the guarantees disposed of. Very careful thought would of course have to be given to such a step, but I believe that it is possible.

Thirdly—and this follows the line of thought of the noble Earl—the Government could look at the sources from which money flows into the building societies and consider whether some of the competition for money is avoidable. This point, as other speakers have observed, has already been recognised by the Government in the case of the banks. In the case of lending up to £10,000, the banks have been asked not to compete with the building societies. But I do not myself regard the banks as the main competitors. It used to be said that the Savings Movement provided the main competition with the building societies in finding money. Today I think that is probably no longer true, and I agree with those who say that the competition comes mainly from the local authorities, who are offering high interest rates for comparatively small sums and thus siphoning off some of the savings that would otherwise have gone to the building societies. I am not blaming the local authorities for this: they have to seek for money and offer high rates of interest to obtain it. But I think there is a possible solution. As your Lordships are aware, there used to be a Loan Board specifically designed to help local authorities and provide them with money at lower and more favourable interest rates. That Board was dispensed with. It was thought that local authorities should raise their money on the market. I believe that serious consideration should be given to reviving this idea. There is no objection in principle to subsidising or giving financial help to local authorities. That principle is accepted; local authorities could not function without various grants of one kind or another which they obtain from the Exchequer.

If the proposal I have put forward were adopted, there would, of course, be a condition; namely, there would be a restriction on high rates of interest offered to the public for small amounts of money required by local authorities. Indirectly this would undoubtedly help the building societies and it would not involve a direct subsidy to the building society movement. I am not asking here for special favours for the building societies, but in my view it is essential, in order to help house building as well as home buyers, that something should be done to enable building societies to carry on their proper function, preferably without direct subsidy. I would agree with what the noble Lord, Lord Hill, said about the magnificent work of the building societies and their great achievements. I think it is in the national interest to consider the situation today of those in the building industry and those who wish to buy their homes. I believe that it would be very much in the national interest to try to ensure that a mortgage famine is averted.

8.9 p.m.

VISCOUNT RIDLEY

My Lords, like other noble Lords, I must declare an interest as a director of a building society, and I should also like to thank my noble friend Lord Kinnoull for introducing this Question. I shall not follow other noble Lords into the labyrinth of interest rates because that has been covered so well by other speakers. I would just highlight what I believe is the major problem facing the building societies at this moment. Since 1964, the average earnings and salaries in this country (at this hour of the night I speak in very round figures) have gone up about twice; the average price of a house has gone up about three times, and the relative average cost of a 90 per cent. mortgage has gone up about five times. I will not at this stage go into the details.

The reason the cost of the mortgage is so much higher than the cost of the house is because of the prevailing high interest rates. The cost of a house has risen disproportionately because of the very high demand which has been put upon the building industry when the supply of houses has fallen short and at the same time the supply of money has been high. Indeed, one cannot blame people who are prepared to pay over the odds, and have been for many years prepared to pay almost too much for the best investment they could ever have made, the ownership of their own house. But there are, I think—and this is perhaps a good sign in this inflationary problem which the country faces—signs that house prices are dropping at this moment. I have heard recently of a builder giving away a mini-car with every house he sells, which is something that would not have happened a year or two back. Other builders are subsidising from their own funds the loan on the deposit which they require from the purchaser. So, while it would be much better if house prices came down much more, it is possible that we are reaching a stage when prices may be stabilising relative to wages.

Further, there is the question of availability of houses on the market. Here the Government must be given some considerable credit for the very real efforts they have made, helped again by the building societies, to improve the number of houses that needed improvement. Quite a large percentage of building society loans are directed to improvements and alterations which generally improve the standard of houses and the housing stock of the country. If time had permitted we could have gone into the question of making more land available for housing but this is something which is rather long-term, and it is outside the scope of the Question to-night.

Having made that point, I should like to give a very real welcome to the option mortgage scheme. We should give full credit to the Labour Government who introduced this scheme. I forget exactly when. I think that the noble Lord, Lord Greenwood of Rossendale, was responsible, but I am not quite certain. This scheme has been, in face of the somewhat sceptical attitude of the building societies at that time, a considerable success, and it is on that success that we should look for further Government action, and further constructive action, towards the ideal of home ownership throughout the country.

We are about to have (and I think noble Lords have already mentioned this), a low-start scheme for those who are borrowing for the first time—young couples and so forth. I know that the building societies would wish that for administrative reasons, costs, and a great many other reasons, this should be done, if possible, entirely through the option mortgage scheme. It is, after all, the very people for whom the option mortgage scheme was designed that such a low-start scheme would also benefit. I hope that it will be possible to consider this as a serious suggestion. It is highly desirable that there should be such a scheme.

I do not know that I agreed with the noble Lord, Lord Jacques, who talked about the question of deferring the interest rate, the maximum impact of the repayments, and so forth. We must recognise that, like all such schemes, and all such hire-purchase schemes, it is deliberately, and perhaps rightly, inflationary in its effect. But I also wonder very much whether the postponement of the maximum repayment, the heaviest burden, for the future years is in fact right. A young couple recently married are often both working. They perhaps have no children, and when the heavy burden begins to fall on them the millstone begins to tighten around their neck. That is when they have children and the wife cannot work. I am not sure that the design of the scheme is quite as the noble Lord would have it.

The other problem is whether this is the right time, when funds are so short, to introduce any new scheme. I should like to think that it is a serious contribution in regard to the problem of the first time borrower, and I think it is he at whom we should be looking to-night. The Government, in due course, should give a greater subsidy to him through the option mortgage scheme; a greater subsidy than the 3¼ per cent. which is now paid from January 1. I know that this is no moment to ask for further Government subsidies. It would be wrong to suggest that Government expenditure can in any way be increased at this time, however desirable in principle. I hope that when, in due course, we are in a position to consider further help to the housing world, this will be one of the most constructive uses of Government funds. As I shall hope to show very briefly, it could be cheaper than some of the other uses to which such funds might be put.

The noble Earl, Lord Kinnoull, who asked this Question, has already mentioned this question of a further subsidy. I know that it is not perhaps universally a good idea, but I should like to think that it is something which could be done relatively simply, is administratively possible, and in due course would be particularly helpful as a sort of pump priming operation.

The question has been raised as to whether or not this would be an unfair subsidy to those who are buying their own houses as against those who are living in council houses, and who have had to pay a considerable increase in rent under the Fair Rents Act. I asked the noble Lord, Lord Jacques, about that, because I think that, although this is no moment to go into figures, it is not unreasonable to give people some form of subsidy, bearing in mind that the rent rebate introduced under that Act reduces the actual cost of housing to quite a large section of the population. It does not seem to me unfair that we should also subsidise another section, those who wish to get themselves their own house and out of the stranglehold of a council house.

It would be wrong to assume that the building societies are always whiter than white. As in everything else, there is a good deal of grey in the flock. The noble Lord, Lord Jacques, implied criticism in that the number of societies had dropped from 3,500 at the turn of the century to 450 at the present time. I would say that this in fact reflects quite a considerable increase in efficiency, in that the numbers have dropped not because some have fallen off the perch but because there have been amalgamations, despite the difficulties to which he rightly referred, and the societies have grown considerably in size and as far as possible have made themselves more efficient. This is only a very small quibble in what I would say was a most excellent and very reasonable review of the problems of building societies.

In the past building societies have given far too many high quality loans for special high quality houses, farms, and special advances of this sort, which, although limited to a certain percentage and carrying a higher rate of interest, have, in palmy times, when there was plenty of money about, meant that there was less available when the wind blew from the other direction and funds got shorter. At the moment, as the noble Lord, Lord Hill of Luton, has mentioned, the percentage of funds being withdrawn, as opposed to the total investment, is a major and serious problem. It would be true to say that in 1973 of the percentage of funds invested as a general figure throughout the movement—and I stand to be corrected—only about 20 per cent. remains in the societies as a general figure to be invested in new houses. This is a frightening figure. You may say it is too low a figure. But in view of the interest discrepancy already referred to, it is something of a minor miracle that the societies manage to retain even as much as that.

The original idea of building societies was very much a socialist theory in principle. It was the ideal that everyone who wants to own his own house should be encouraged to do so. This must still be the aim that this Government, and this country, should pursue, and should strive in every way to achieve, even if the aim would appear to some people to be somewhat less socialist now than previously. I would hope that the percentage mentioned by the noble Earl, Lord Kinnoull, of owner occupation has risen from about 25 per cent. at the end of the Second World War to about 52 Der cent. Now; and it is this second half of the population that we should regard as the ultimate target to increase that figure beyond what it is now.

I would think that in the very long term by helping these people (so far as they want to be helped), towards the ownership of their own house, the cost to the State will be far less, in one way or another, than the inevitable rise in the cost to the State of council house sub- sidies. After all, if you are confined to a council house you have to pay rent for ever, with nothing to show for it at your death; but if you are paying a mortgage, even though that may be higher, you may, in the end, achieve your own house and have something to show for it in due course. This ought to be something that we are proud to encourage.

8.20 p.m.

LORD ROYLE

My Lords, on an occasion such as this one does not feel like going too deeply into the whole history of the building society movement. But may I say straight away that I should not be here to-night, particularly at this time, if I were not grateful to the noble Earl, Lord Kinnoull, for introducing this subject. The fact that I am here now proves my gratitude to him. He will not expect me to go over all the points that he made so very well and so comprehensively, and I hope that other speakers will forgive me if I merely emphasise what they have said. I am quite sure that my noble friend Lord Jacques will also forgive me if I do not try to analyse all his points. I found his speech fascinating and I hope to read the report of it. The day may come when we shall go very deeply into the matters that he raised, and even into his criticisms of the movement. At the commencement of his speech he said that some of us here are better informed on this subject than he is. All I can say is that if we are better informed, we are very well informed indeed.

I turn for a moment to the noble Lord, Lord Hill of Luton. I also want to declare my interest. If he gets in a bit of advertising, I, too, will get some in. He has declared that he is a director of the Abbey National Building Society, and he will forgive me if I say that I have the privilege of being chairman of the Alliance Building Society. He claimed that the Abbey National is the second largest in the country. All I can say is that the Alliance is the 106th, but it is the best. If he ever considers the question of a merger, we shall be prepared to take over the Abbey National at any time.

The whole range of the movement has been discussed to-night, so I can be very concise indeed. It is completely new in your Lordships' House for us to discuss the Question: what do the Government propose to do about the problems confronting the building societies? It is the Government's fault that the building societies find themselves in their present position. In the Budget of 1973, the Chancellor handed out all kinds of tax reductions to the better-off. He had to find money with which to do it so he attracted funds by increased investment rates, which took a great deal of money from the building society movement. But, even worse, that was followed by other people offering high rates. Then the banks rode in and started to offer very high rates, which meant that competition was more and more difficult for the building society movement. As has already been pointed out, the local authorities also joined in and offered high terms such as they are offering at the moment, many of them for very short periods, for which the ratepayers will pay very heavily in the future. That is the kind of competition which we have at the moment. Investment in building societies has almost reduced to the point where we cannot see it, and the month of December was a very poor month indeed for all the building societies in this country. Our 7½ per cent. free of tax to normal taxpayers is still a long way from being competitive, but it is not our fault. I ask your Lordships to forgive me for using words such as "we" and "I", but that is inevitable. I really should be saying "building societies" and not "us". Her Majesty's Government have said, "All right, the banks can pay only 9½ per cent. up to £10,000", but if you happen to have £100,000 the sky is the limit. It is an extraordinary situation and it does not help the building societies at all.

In the autumn of 1973, the Government got together with representatives of the Building Societies Association and the result was a memorandum of agreement which set up a Joint Advisory Committee. I should like to ask the noble Lord who is to reply what that Joint Advisory Committee has done up till now. What has it considered? There is still a great shortage of invested funds, which means that there is very little money for mortgages, which have to be charged at 11½ per cent. I underline what the noble Lord, Lord Hill, said, and I ask: is the building society movement a social asset which causes the Government to regard them in a priority sense? Other people who are attracting funds to themselves are not doing a social service in the same way as the building society movement. The Government should regard us in that social sense and should consider what we are doing for the people as a whole.

I should like to ask first, whether the Joint Advisory Committee has considered means of helping us to be more competitive for funds; secondly, has it considered deferment of interest payment schemes; thirdly, has it considered index linking schemes; and, fourthly, has it considered more term schemes, which are very important? Are we not justified in asking the Government to consider a reduction in the tax which building societies pay? The building societies pay corporation tax and composite tax, and the time has come when they would be helped very considerably indeed if the Government reduced the rates of taxation. These questions are so urgent and so important, because house-building in the private sector will almost come to a halt if funds are not available. I agree with other speakers, that in these days of enormous inflation, with the massive problems which the Government have on their shoulders, it is asking a great deal to expect them to go deeply into the difficulties of the building societies. But if homes are important, then suggestions of help for the building societies may be the most important item on the Government's list of priorities.

Reference was made by the noble Viscount, Lord Ridley, to my noble friend Lord Greenwood of Rossendale, and to the mortgage option scheme which we all appreciate. I was glad to hear that compliment from the other side of the Chamber. These last few days my noble friend has been initiating talks between some of us in the building society movement who are Members of your Lordships' House. We have very much appreciated those talks, and I am pleased that my noble friend managed to get here tonight at this late hour. As I said, this is a very important and serious matter and I hope that the Government are thinking about it as seriously as the movement is.

8.30 p.m.

LORD WAKEFIELD OF KENDAL

My Lords, like other noble Lords, may I say how grateful I am to my noble friend for giving us this opportunity to-night to talk about home ownership—because that is what this debate is all about—and for giving us the opportunity to question the Government's policy on how to maintain home ownership in the future as it has been maintained in the past. I am taking part in this debate because nearly fifty years ago I started with the building society movement as a saver and in particular as a first-time borrower when I first set about getting my own home, and I have been closely connected with the movement ever since then. I am privileged to be a vice-president of the Building Societies Association and president of the Metropolitan Association of Building Societies. I should like to say that any views that I express here to-night in no way necessarily reflect the views of either of those great and distinguished organisations. Also like other noble Lords, I am a director of a building society, the Portman Building Society—perhaps not quite as large as the society of the noble Lord, Lord Hill, but at any rate a society which, like all other societies, does its utmost to give a good service to those who both save with it and borrow from it.

My Lords, for many years there has been no need to discuss building society affairs in Parliament, for a very good reason. The building society movement is non-Party political and, as has already been stated, has no equity shareholders. Again as noble Lords have already said, the movement encourages personal savings and home ownership—and is that not an objective of all political Parties? It is a very safe and convenient form of investment for, as my noble friend Lord Kinnoull has already said, some 14 million savers. The societies are managed, as the noble Lord, Lord Hill, has said, successfully and efficiently at low cost, and through their agencies some 4 million families have enjoyed the satisfaction of home ownership. These are the facts.

Therefore, my Lords, it came as a very great shock to all those who so successfully direct and manage building societies suddenly to find themselves, a few months ago, being attacked politically on a number of grounds, such as charging too high rates of interest to the borrowers; for being the cause of high land and house prices; for having some 2,000 branches all over the country; for having too much cash, and indeed for being one of the reasons for the evils of inflation from which we are now suffering. There was, and I think there still is, a deep feeling about the unfairness and the injustice of these and other accusations and allegations. After all, have not successive Governments urged and encouraged home ownership? Have not the building societies done their utmost to support all Governments, whatever their political complexion, to that end? Why, then, my Lords, should politicians suddenly turn and bite the hands of those that feed them? Why should this great movement suddenly be made the scapegoat for political ends? We may well ask ourselves these questions—to which, quite frankly, I know no satisfactory answer other than perhaps that of political expediency and, to be charitable perhaps, ignorance of building society economics. After all, as again every speaker has emphasised—and it cannot be emphasised too often or too strongly—building societies borrow short and lend long.

In times of monetary stability there is no need to change the rates for investors or for borrowers. Indeed, building societies dislike intensely making changes in their borrowing and lending rates because such changes are expensive to make. But when the rates of interest in the other competitive savings sectors improve, then building societies must keep in line, as has already been so clearly stated by noble Lords who have spoken previously. Perhaps I may remind your Lordships that it was only after, and not before, the Government increased the return on National Savings that the building society movement had to follow and increase its rate substantially so that its cash flow and its liquidity position could be maintained; because—again, this point cannot be stressed too often—building societies borrow short and lend long.

The noble Lord, Lord Royle, has just dealt in some detail with the situation concerning the competition and the raising of the National Savings rate, so I will not go into that in any further detail; but societies must retain adequate cash resources, not only to meet the future mortgage needs but—and this is so important—to be able to pay out savings on demand. It is this payment on demand to investors, who for one reason or another may suddenly want to have their savings back, that is one of the great attractions to saving with the building society movement. Perhaps your Lordships will have noticed that although there are approximately 14 million savers against some 4 million borrowers, it is always the mortgage rates that get the publicity; the sympathy always seems to be with the borrower rather than with the lender. This seems to me to be strange, because it is the lender, surely, who deserves the high interest rates as his money rapidly becomes worth less and less; while it is the borrower who, until recent months at any rate, has seen his land and bricks and mortar steadily become worth more as he pays off his debt with money which is becoming worth less and less. I rather suspect that most financial editors and financial column writers are heavy borrowers, and it would be surprising if they were not because they are all people who ought to know the advantage of borrowing from a building society for home ownership.

My Lords, I do not think that the routine administrative problems that building societies have to face are any different from what they have always been. These are to ensure that the value of the property to be mortgaged is adequate to meet the advance made upon it; that the borrower is in a position to make the required monthly, quarterly or annual repayments; and, what is most important, that he is going to be in a position to continue to do so in the future. There is no great difficulty about all this when house prices are constantly rising and, at the same time, incomes are rising as well; and in this respect I think that it has been fairly easy going for building societies in recent years. The difficulties arise, though, when house prices and incomes fall, and this may well be the greatest problem which will face building societies in the coming months. The security upon the loan is reduced, and the ability of the borrower to pay becomes less.

That is why, my Lords, I so greatly welcome the setting up of this Joint Advisory Committee to enable the repre sentatives of the building societies regularly to meet representatives of the Department of the Environment, the Treasury, the Registrar of Friendly Societies and the Bank of England. These regular meetings, this excellent means of communication, will, I hope, ensure adequate discussion of building society affairs. I would hope that as an early outcome of these meetings we might have an indication of the Government's view on the proportion of savings out of the total national savings desired to be devoted to home ownership. During the last decade the proportion has risen from about 30 per cent. to over 50 per cent. This increase has been fairly steady except on two occasions. In 1967 the proportion jumped from 31 per cent., all in one year, to 48 per cent., and from 37 per cent. in 1969 to 58 per cent. in 1970. The other main sources of saving, of course, are the banks where deposits are so necessary for industry, the Stock Exchange and the National Savings movement. At the same time we have the local authorities, with their local loan schemes. The noble Lord, Lord Hill, and the noble Lord, Lord Royle, made reference to how great is the competition from these sources.

I would ask the Government these questions. Is the present proportion of personal savings devoted to home ownership too much or not enough? To what extent, if any, is such a high percentage the cause of inflation? What are the priorities in the various savings groups? Is home ownership at the top of the order of priority, in the middle or at the bottom? I suggest that the public is entitled to know the Government's thinking on these matters. I know that other noble Lords have referred to the question of priorities. I think that this is at the bottom of the whole situation. Where is home ownership in the list of priorities? As I see it, the most serious problem facing the building society movement at present is how to reconcile a high enough investment rate to attract the flow of funds needed, and maintain a healthy rate of house building, with the urgent need to keep mortgage rates as low as possible to ensure that borrowers are financially able to make the required repayments of money borrowed, and, of course, the interest on it. The two rates are interdependent.

There are plenty of investors anxious and willing to place their money in building societies if they can get a better return from the societies than from elsewhere. But if the interest rate is high the money that is available becomes too expensive for the borrower, and home ownership, the objective of the building societies, is frustrated. Therefore if the house building industry is to prosper and home ownership to continue to increase, it is essential, as I see it, for money interest rates to fall and the value of money to become steadier. This is why everyone ought to be doing everything possible to try to help the Government to defeat inflation. If inflation is not defeated we shall suffer as the Germans suffered after the First World War, when they allowed inflation to get on top of them.

In conclusion, my Lords, may I say that the great strength of the building society movement lies in the confidence that the public rightly have in the integrity of its direction and management, and in the efficiency and the personal service given to savers and to borrowers through its branches. People value the independence of building societies and their freedom from political interference because the motives of the whole movement are quite non-Party political. As has been said, but it is worth repeating again and again, the sole aim of the movement is security of investment for the saver combined with help and encouragement for home ownership. To prevent abuses the movement is strictly controlled, and rightly so, by Acts of Parliament. For these reasons, I hope that the Government will do all in their power to help in whatever way possible—and various valuable and constructive suggestions have been made tonight—to enable building societies to carry on their good work as best they may in the future as they have done in the past.

8.45 p.m.

LORD MOWBRAY AND STOURTON

My Lords, we must all be grateful to the noble Earl, Lord Kinnoull, for raising this very important topic at this time. I should like to pay tribute to his wide knowledge and experience in this field, which is well known to all Members of your Lordships' House. I know also what a responsible position he occupies in the movement. I am slightly abashed be- cause I am the only Peer taking part in this debate who has never at any time in his life had anything to do with a building society. I appreciate that every noble Lord who has spoken is an important officer in a building society.

Before I turn to the main theme of the debate I should like to take the opportunity to clarify one or two points about the option mortgage guarantee scheme which we discussed at Question Time on December 3 and to which my noble friend Lord Kinnoull referred again to-day. He asked whether we would increase the limit of £7,500 to £10,000. I was pleased to hear my noble friend Lord Ridley praise the option mortgage scheme and, quite rightly, pay tribute to the noble Lord, Lord Greenwood of Rossendale, who had so much to do with its birth. It is normal practice for the building societies to advance from 60 to 70 per cent. of the value of a house, and to advance larger loans on payment of a premium to an insurance company for an indemnity policy. This covers the society against loss in respect of the excess over its normal level of advance.

The option mortgage guarantee scheme has the effect of reducing the premium paid by an option mortgagor for an indemnity policy, because the Exchequer shares the risk of loss with the insurance company. The scheme does not apply to local authority mortgages because normally local authorities are prepared to issue high percentage loans without asking for an indemnity policy. I think it also important for us to understand that the guarantee scheme does not and was never meant to ensure (this point was made by the noble Lord, Lord Hill) that an option mortgagor will necessarily receive a high percentage loan. That must depend on the extent to which the lenders have funds available for lending at the price reserve. So, unlike the option mortgage subsidy scheme, the guarantee scheme is subject to a host price limit. It originally applied to houses if the purchase price (or the valuation, if lower) did not exceed £5,000. In 1971 the Government raised the limit to £7,500.

I have said, and I repeat, that we have received no representations from borrowers or lenders for an increase in this limit. There may be two reasons for this. I suggest first that there are still many houses costing under £7,500. I repeat, my Lords, about 31 per cent. of all dwellings newly mortgaged to building societies in the third quarter of last year cost under £7,500. The noble Lord, Lord Royle, asked in the debate whether the figure under £7,500 was the cost of the mortgage or the cost of the house. I can confirm that it was the cost of the house—

LORD ROYLE

My Lords, I did not ask that in the debate but during Questions.

LORD MOWBRAY AND STOURTON

My Lords, I beg the noble Lord's pardon. It may surprise some noble Lords, but these figures are derived from information supplied by the societies.

Secondly, my Lords, people who buy more expensive houses would normally have sufficiently high incomes to qualify for full tax relief on mortgage interest. Consequently they would not normally want an option mortgage, and therefore would not be eligible to use the guarantee scheme. For these reasons it does not seem to us necessary to do as the noble Earl, Lord Kinnoull, asked, and consider an increase in the limit at this time. But I assure noble Lords that the Government will keep the question under review.

The noble Earl, Lord Kinnoull, suggested, as did the noble Lord, Lord Royle, that the composite rate of tax paid by building societies might be made more favourable in order to increase the competitiveness of the movement as an investment medium. At the moment the Inland Revenue arranges to collect from the societies as much tax as individual investors would as a whole be liable for. At present the composite rate does not involve the forgoing of any Exchequer level. To go further would amount to specially favourable treatment for one institution at public expense; and, as the noble Lord, Lord Jacques, indicated, that might not be popular with all sections of society.

My noble friend Lord Kinnoull and I think also the noble Lord, Lord Wade, indicated that local authorities might be asked to reduce their rate of interest which they quote when advertising loan stock. But local authority treasurers have to finance the programmes which their elected councillors and sponsoring Gov ernment Departments agree should be undertaken. Any restriction on the rates which they offer in advertisements to small investors would tend to force the authorities on to the money market, which might add undesirable pressure to interest rates. So in principle the effect of these suggestion appear to be that one would be diverting funds from the public sector to the building societies, a course which presents obvious difficulties.

The noble Lord, Lord Wade, mentioned an Exchequer guarantee on building society reserves and liquidity in general, including Exchequer underwriting of any loss incurred by societies in selling any liquid assets such as gilts. I am advised that, though this is an interesting proposition, it could have serious adverse effects on public borrowing requirements and public expenditure, and therefore we should not be willing to consider that.

LORD WADE

May I just intervene very briefly, my Lords? I was putting this forward as one of three possible courses. The third course, which I prefer, referred to local authorities, and the key to that point was to find some way in which the local authorities would not be adversely affected.

LORD MOWBRAY AND STOURTON

My Lords, I take the noble Lord's point. I should also like to add that in order to protect building societies from some investment competition, the Bank of England has requested banks to limit to 9½, per cent. the interest they pay on deposits of less than £10,000. That is a positive step taken by the Government.

My noble friend Lord Kinnoull asked about the extension of building society activities in the E.E.C. We are considering very carefully the representations which have been made by the societies in this connection. My noble friend also suggested that building societies might be allowed to invest in property in this country as a category of permitted non-mortgage asset. This, we feel, would not be appropriate because the purpose of societies investing in assets other than mortgages is to make liquid funds available in sufficient quantity to meet its needs, and real estate would not represent a liquid investment.

The noble Lord, Lord Jacques, interested me very much in what he said concerning building society amalgamations. Your Lordships may be interested to learn that the Chief Registrar of Friendly Societies has on a number of recent occasions suggested that societies might merge whenever it would be economical and practicable to do so. I can say that the Government are sympathetic to the idea of reducing statutory obstacles to mergers.

I should like now to turn to what I consider to be the main problems facing building societies. These we have heard ably expressed by many of your Lordships to-day. It goes without saying that the importance to the private housing market of a healthy and vigorous building society movement cannot be over-emphasised. The noble Lords concerned have rightly patted themselves on the back. Building societies are of great significance, both as a medium for investment and as the principal lenders of finance for house purchase. The assets of the movement amount to some £16,000 million. They have 14 million investment accounts and about 4 million mortgages. About 70 per cent. of all business is handled by the twelve largest societies, even though there are in total still 450 societies in existence. They have, as has been said already, so won the confidence of investors over the years that they have been able to borrow short and lend long on an increasing scale. The growth of owner occupation, as my noble friend Lord Kinnoull said, has gone up from 26 per cent. of the housing stock in 1944 to an estimated 52 per cent. last year. This is in no small measure due to the success of building societies as a specialised savings institution. My noble friend Lord Wakefield asked me where in priority the Government put house ownership. I do not think I can do better than to repeat what many Members of the Government have previously said—and I would expect Members of the Opposition to have similar views—that they regard home-ownership as having a very high priority indeed.

If we look back over the last ten years or so, we find marked swings in the availability of mortgage funds. When there is a shortfall in available mortgage funds, many prospective house buyers cannot get a mortgage. Builders then cut back on their planned programme of stocks and run into financial difficulties because their capital is tied up in houses under construction. These cannot be sold as quickly as they can be completed. When there are plenty of mortgage funds, builders may not have enough houses in the pipeline to meet the upsurge in demand. As a result, too much mortgage money can chase too few houses and consequently house prices can go up sharply—as we saw in 1972. The potential house buyer may be able to get a mortgage, but he is faced with an unwelcome increase in house prices.

The damage which an excess of mortgage funds can do has been clearly demonstrated in the last few years. In 1972, when societies were flush with funds, prices rose sharply, but as receipts have fallen this year house prices have stabilised. According to figures recently published by the Nationwide Building Society, average prices for the Society's transactions in the fourth quarter of 1973 were up by only half per cent. for new houses and were unchanged for modern second-hand houses, as compared with the third quarter of 1973. There are also reliable reports that the price of land is stabilising, and substantial falls have been reported in some cases.

The problem of swings in the flow of mortgage funds was thoroughly examined in our discussions with the Building Societies Association and, as the House will know, the Council of the Association recommended to its members last autumn an agreement entered into by the Council and the Government, the terms of which were published in another place on January 16. The main objectives of the agreement are to support the growth of owner-occupation, with a reasonable choice for purchasers; and to facilitate a high and stable level of house-building and stability in house prices.

Under the agreement—I believe the noble Lord, Lord Royle, will be interested to hear about this because he asked me what the Joint Advisory Committee were doing and what, if anything, they were up to—a Joint Advisory Committee is being set up consisting of representatives of the Government and the Building Societies Association. They have had three meetings so far. The Committee is going to provide regularly the Council of the Association with an analysis of the current situation and forecasts of what might be the appropriate level of investment in, and lending by, building societies. My noble friend Lord Kinnoull asked me whether it was intended that this information should be made generally available. The answer is "No", because it is meant primarily to assist the Council of the Association in its deliberations on recommendations which it makes to member societies. The noble Lord, Lord Jacques, will also be interested to know that the Council is going to recommend to member societies a flexible use of interest rates and liquidity, and the selective lending policies designed to achieve those objectives.

THE EARL OF KINNOULL

My Lords before by noble friend leaves that point, would he not agree that any statistical information that this Advisory Committee can produce will be of immense public interest as well of interest just to the Council?

LORD MOWBRAY AND STOURTON

My Lords, I will certainly consider that. No doubt the Joint Advisory Committee will read about this debate and consider the noble Lord's point. I have no doubt that he and his Society, the Property Owners' Building Society, will have friendly contacts with members of the Association and will probably be able to get information which will not be available to the public. As an important element in the new voluntary arrangement first-time purchasers and the buyers of new houses will of course figure prominently in the allocation of available mortgage funds. I am glad to say that the 20 largest societies—accounting for about 75 per cent. of the movement's assets—have indicated their explicit support of these arrangements subject to their responsibilities under Statute and to their depositors and members.

It is true that there are at present difficulties arising out of the supply and cost of mortgage funds. The problem is essentially one of the rates of interest which have to be offered to attract funds for mortgage lending. The general level of interest rates in the economy has to be allowed to fluctuate if the Government are to retain effective control of the growth of money and credit. This is an essential component of the general strategy against inflation. Furthermore, rates in this country have to be high enough in relation to those overseas to prevent funds from being attracted out of London. Otherwise our exchange rate would fall and our import costs would rise—including those for food and raw materials. The increased prices would add to the cost of living and prejudice the Government's counter-inflation policy.

In these circumstances building societies have not found it possible at the investment rates (as the noble Lord, Lord Hill of Luton, said, the recommended rate is 7.5 per cent. net), which they currently offer to attract as much new money for mortgage lending as they would wish. But building societies have still been advancing considerable sums of money. On a seasonally adjusted basis, they entered into new commitments totalling £222 million last month. This is a not inconsiderable sum. I have been asked during the debate whether the Council of the Associaion should increase the recommended rates structure at the present time. This is a matter for the Council themselves. I have little doubt that they will continue to act with their usual good sense in this matter. But we are hopeful that in the longer run the new voluntary agreement between the Building Societies Association and the Government on mortgage finance will lead to a more stable flow of mortgage funds.

Building societies have always tried hard to help people to buy their first homes. Several noble Lords, particularly the noble Lord, Lord Hill, raised this point. Moreover, the Government have taken a series of measures—such as the abolition of S.E.T. and of stamp duty on conveyances up to f10,000—to reduce the cost of house purchase. And it is a fact that the numbers of first-time purchasers have increased very considerably since the Government took office. In 1969, only 264,000 building society mortgages were granted to first-time purchasers; in 1972 the number had risen to 371,000. Nevertheless, we recognise that in present circumstances some people on the threshold of home-ownership may find it difficult to meet initial mortgage outgoings.

But the Government have been very conscious of the need to ease the transition into home ownership of first-time buyers on lower incomes. This was a problem about which we had full discussions with the representatives of the Building Societies' Association. We considered various possible ways of helping first-time purchasers with their initial mortgage payments. This point will interest my noble friend Lord Kinnoull, who asked about low-start mortgage schemes, and the noble Lord, Lord Jacques, who asked about deferred payments mortgages. There emerged from these discussions a proposition for a selective scheme for first-time purchasers based upon the deferment of part of the mortgage repayment due in the initial years of a mortgage. The effect would be normally to reduce the mortgage repayment from 11 per cent. to the equivalent of 8.5 per cent. in the first year. There would be a progression to the full rate chargeable over the following four years. The extra debt due to deferment could be repaid on sale or over the latter years of the life of a mortgage.

My noble friend Lord Ridley proposed that deferred payment schemes should be limited to option mortgage schemes. Although it may be administratively convenient to lenders to limit the scheme to these option mortgages, it is not immediately evident why in equity the scheme should not be made available to mortgagors choosing tax relief, but this is a matter which is being considered in the course of discussions which the Building Societies' Association is having. The Council of the Association have said that they are willing to recommend such a scheme to member societies. We are making good progress in technical discussions with the Association on the content of a detailed scheme for recommendation to their member societies. I hope that they will soon be in a position to promulgate it. I hope they will also be in a position to hold consultations on the scheme with local authority representatives as well.

The Government believe that the scheme could prove to be very helpful. Of course, it will not be suitable for everyone, but it should be extremely useful for many first-time purchasers—it would have the effect of reducing the net mortgage outgoings in the first year of a 25-year repayment mortgage at 11 per cent. by about one fifth.

My noble friend Lord Kinnoull suggested that the Government might sponsor a fund—I think he suggested £100 million—lending money at a preferential rate of interest to help to finance low-start mortgages. This would involve extra public expenditure and a new subsidy for owner occupation. However, it is only right to recognise that mortgagors can get substantial assistance through tax relief on mortgage interest or the option mortgage subsidy. This has the effect of reducing mortgage interest rates by about 30 per cent. Moreover—as is often pointed out in discussions of the position of mortgagors—a house-owner does not pay capital gains tax on any increase in the value of his house. My noble friend Lord Ridley mentioned the increased rate of option mortgage subsidy. This would mean another extra subsidy for owner-occupiers, to which I have referred in principle before. The proposed scheme has been criticised on the grounds that it would add substantially to the mortgagor's debt. But this consequence of the scheme can be exaggerated. We believe that most mortgagors would be able to clear the extra debt without much difficulty on sale or in the later years of a mortgage. And clearly the Council of the Association—which represent most building societies—would not have been prepared to support the scheme unless they thought it was both prudent and reasonable from the point of view of both lenders and borrowers.

I think it is true to say that both the Government and the Opposition want everyone who prefers to own his own home to be able to do so one day. But this raises a number of fundamental and formidable questions which are of immediate concern to the way in which building societies operate. We can climb upwards, my Lords, towards Utopia; but it still lies some way off!

The Government are not so complacent or shortsighted as to believe that no further thought should be given to the problems facing building societies in the private housing market. The longer-term problems are complex. The solutions are neither obvious nor simple. I therefore agree with the noble Earl, Lord Kinnoull, that all concerned with the future role of building societies could well consider propositions which may seem radical, but which may be worth close examination.

My Lords, if I may trespass on your patience for a few more moments, I should like to give you such examples of what such ideas might be. Building societies obtain their funds chiefly from personal, small, short-term savings. But given that the amount of such savings is limited in the short-run, there may be a limit on the proportion and the total of these savings that societies can attract. My noble friend Lord Kinnoull said that he thought it was a pity that they were limited to no more than £10,000. I think another noble Lord pointed out that where there was a husband and wife, in that case of course it would be £20,000.

In these circumstances, is there some way in which societies can offer more attractive terms for larger longer-term deposits? The noble Lord, Lord Hill, and the noble Lord, Lord Royle, were both interested in this point particularly. Building societies already offer special terms to a limited extent. Is there any advantage in pushing this practice further? Is there perhaps a case for attempting to attract institutional investment in building societies? Is there perhaps, my Lords, a case for exploring new forms of investment in building societies? I note with interest that the Building Societies Association have floated the idea of deposits which would be revalued by linking them with the movement of an index. One or two commercial firms are also exploring the idea of equity mortgages, under which the mortgagee recovers a share of any capital appreciation on a house in return for providing a loan at a reduced rate of interest. These are interesting possibilities which I am sure it is right to explore.

My Lords, I would say to the noble Lord, Lord Hill, that all house purchasers, like everyone else, will benefit, of course, if we can beat inflation. That is the common theme that runs through all this Government's economic policies. I think I cannot emphasise that too strongly, and I think it is well known to your Lordships.

Noble Lords will not expect me to offer a Government view on these longer-term possibilities to-day. They raise larger issues which demand and justify much fuller consideration. I would only say that we should all keep an open mind about the path which it would be right to take in the future, but that care should be taken not to choose the wrong path. Many people have cause to be grateful for the way they have been helped by building societies to own their own homes; and I have no doubt that the community will continue to need the services of a thriving building society movement.