HL Deb 27 November 1979 vol 403 cc373-85

4.54 p.m.

The Earl of GOWRIE

My Lords, this is one of those rather comatose afternoons in which one could get away with moving the most horrendous measures in an uncontentious way! I beg to move that the Building Societies (Special Advances) draft Order which was laid before this House on 14th November be approved. This order increases from £20,000 to £25,000 the limit above which a sum lent to a person by a building society is treated as a special advance. Under the Building Societies Act 1962, special advances, which also include all loans to companies, are limited to a certain proportion of all loans made in a year. This proportion is normally 10 per cent. The special advances limit was originally set at £5,000 in the Building Societies Act 1960 and has been increased four times since then. The present limit of £20,000 was set in 1975. Since then inflation in general and the increase in house prices in particular have made it desirable that the figure should be increased. The Act prescribes that the limit may be increased by order of the Chief Registrar of Friendly Societies with the consent of the Treasury. An increase to £25,000 will restore a reasonable freedom of action to building societies.

This does not mean that societies will immediately make many more loans of over £20,000 at the expense of lending to first-time buyers. In fact, very few societies have been making special advances up to anywhere near the permitted 10 per cent. of total advances. The average building society advance in the United Kingdom in the third quarter of 1979 was less than £13,000, and it is reasonable to expect that the vast majority of advances will continue to be well below the limit. But raising the limits will help some societies, particularly those operating in the South-East where high house prices have led to a demand for larger loans which has made the special advance limit a real constraint. Increasing the limit will also save a certain amount of administrative inconvenience for building society branches which have to go through a special procedure for each loan which is treated as a special advance.

Under the terms of the Building Societies Act, societies may work to the new limits in the financial year which begins after the date on which the order comes into operation. Since most societies' financial years begin on 1st January, the new limit will affect them almost immediately. Other societies will be able to take advantage of the new limit at their current financial year's end. An increase in the limit is justified on the grounds of the recent increase in house prices and in the average mortgage advance. The increase proposed will restore some freedom of action to those societies which need to make loans of over £20,000 because of higher prices in some areas, but will not remove the distinction which the limit provides between normal loans to finance owner occupation and larger loans which may be more akin to general business transactions. I invite the House to approve this order.

Moved, that the draft order laid before the House on 14th November be approved. (The Earl of Gowrie.)

4.58 p.m.

Baroness BIRK

My Lords, obviously, with the rise in house prices which has been so dramatic in the last few years, it would be quite unrealistic to oppose this unfortunate increase. I must warn the noble Earl that I am feeling neither comatose nor particularly uncontentious this afternoon. This highlights the Government's catastrophic economic and financial policy. If people can borrow more, then they will be enabled to pay more for their houses. All the measures which we have seen over the last few weeks the Government have been very anxious to say are in order to bring down inflation, but this means that inflation is going to go up again in a further spiral. The increase is to keep pace with inflation, but one has to be earning in excess of £10,000 a year to be able to pay interest on a £25,000 advance. The effect of this order is to help people with higher incomes but not those with lower incomes.

I listened very carefully to what the noble Earl said and I have looked into the background to these orders. I am quite aware that there were increases in 1967, 1971 and 1975 and this increase now proposed. However, one of the big differences now is that there is to be a further increase against the background of the Government's monetarist policies which appear to be in a considerable muddle. With mortgage rates at a height at which they have never been before; namely at 15 per cent. and possibly going even higher, this means that first time and other buyers who want a £25,000 special advance will have to pay £3,750 a year in interest, which works at out £312.50 monthly.

When my noble friend Lord Jacques moved the order in 1975, the noble Lord, Lord Sandys, from the Opposition made the only comment which I think has been made on this; namely, whether the proposal would have an inflationary effect on house prices. With inflation now running at over 17 per cent. and with all the other measures, such as VAT at 15 per cent., which are increasing inflation, it seems to me that this must have an even greater inflationary effect than it has had in the past.

I should like to ask the noble Earl about the period of repayment. It seems to me that, unless the repayment period is increased, there will be very great hardship. It is true that most building societies charge more interest on special advances, but the institution of building societies has really now become a tool for Government because they are operating on such an immense scale. Therefore, their influence on the rate of inflation and consequently on the whole cost of living is extremely great.

There is another question which I should like to ask the noble Earl. At the moment, the mortgage is usually worked out on whether a person can undertake it at 2½ times his annual salary, but—with the special advances put up, together with all the other inflationary factors—the Government might consider asking the building societies to make it twice the annual salary rather than 2½ times. In my view, the Government would be justified in pressing the building societies on this point.

The minimum lending rate is now so great that obviously the mortgage rate had to be forced up, although the building societies are unhappy about it. This comes from a Government which denounced, in the strongest terms, high mortgage rates in their election manifesto which said they were a deterrent to those wanting to buy their homes and would cause acute difficulties for those who had already done so. I entirely endorse that view, but now we have mortgage rates so high that it will be even more difficult to persuade people to moderate wage demands.

I do not know whether the noble Earl saw the programme" Weekend World "on the Sunday before last in which a factory in Wolverhampton was taken as an example, and where the workers had in fact moderated their demands on one occasion in recent years in order to try to keep the works going and to prevent unemployment. When they were asked on this occasion, they said that they were concerned about unemployment, but they were very much more concerned about inflation; in particular, one worker said that he just did not know how he was going to pay his mortgage—and that was before it had risen to 15 per cent.

It is an extraordinary policy that while at one and the same time the Government are stressing—and quite rightly—the need to bring down inflation, on the other hand they are enacting a whole series of measures that not only add to inflation but also must cause increasing wage demands. As with so many of the present Government's measures, I am afraid that this is again preferential treatment for the "well-heeled" and the others will again go to the hardship wall. The hardship which will be suffered by people who are trying to buy their own houses, or trying their best to stay in them, will be very considerable. It will be a bleak winter—and there will be many bleak years for a great many people. Obviously I cannot oppose this order, but I think it is really another stone in what is becoming an almost unbearable burden of hardship for so many people in this country to endure.

5.5 p.m.

The Earl of SELKIRK

My Lords, I do not want to be contentious but I should like to make one or two remarks on what has come before us today. When I speak on housing I always declare that I am President of the Building Societies Association, although I do not normally speak for them. I speak for myself. However on this occasion I have to express a regret on their part. The regret is this: they suggested to the Government last January (so in fact it was another Government) that the special advance rate should be not £25,000 but £35,000 and they believe that the reason why it has been kept at £25,000 is not a practical one but is the very reason that the noble Baroness, Lady Birk, (who was formerly at the Department of Environment) has stated—namely, a misconceived idea that this keeps down the price of houses. Perhaps I may say with respect to the noble Baroness that she should know that it does not really have that effect.

The building societies put it to the Government that the figure should rise from £20,000 to £30,000; nine months went by and the first intimation they had came from reading a newspaper. That is regrettable, because there is ample opportunity to talk to them and to tell them about the problems. In 1960 the figure was £5,000. In fact I believe it was £5,000 in 1894 and I do not know what £5,000 in 1894 would be today. It would be a considerable sum, probably in six figures, but, if we take it at the 1960 value, the equivalent value today of £5,000 would be about £45,000. I think that is the way it should be looked at.

The problem with regard to the housing market is this: there are about a million people every year who change their houses. It is extremely important that we should make the fullest use of the houses available in this country and that people should be able to change their houses as easily as possible. Some people want bigger houses, some want smaller houses; some people want houses in different places. If they cannot get the money to change houses, this has a log-jamming effect on the whole housing market and that is why changing houses is a difficult and always anxious job, because a person has to sell one house and buy another and if he does not get an easy changeover it will cost him a lot of money, not only in mortgage money but probably in other expenses which arise.

The building societies consider that it would be much easier if the rate at which they could change houses without reference to the registrar were £30,000 instead of £25,000. I know the point made by the noble Baroness, that the prices are high, is very disturbing but the average price of a new house in the month of August this year was £23,900. Of course some houses have one bedroom, some have two, some have three, some have four, and some have five, and it may be taken that some new houses cost considerably more than that. There are parts of London which are considered to be reasonable areas in which one would probably not get a house under £40,000. If you stop people at the top changing their houses you affect people right down the line. If houses can change hands easily and quickly, it makes it easier and cheaper for everyone to get into the type of house that they want.

We regret very much that the Government should not have discussed the problem with the building societies: I believe this may have the effect of making houses more expensive and it will certainly be more difficult for people to change from house to house. This is very important because at the present time rented houses are difficult to get and council houses are impossible to get unless you live in the area.

Probably the easiest way and the quickest way to move from one place to another is to buy a new house. To put it bluntly, that is a fairly cumbersome business. It is important that these changes of houses should be as easily accomplished as possible, and if more than a certain number of special requests have to be made that is going to make it marginally more difficult. The great majority of houses, 90 per cent. of them, will be within the limits set. But the number which require special advances will inevitably be quite a few, and it does release the log-jam for some of the bigger houses to change hands. It is just as bad to live in a house which is too big for you as to live in a house which is too small for you. I express these views because I think it is really quite a false assumption to think that this is going to have a restricting effect on the price of houses. I do hope the Government will think carefully about this, because I think it helps the whole housing market to be able to have as free an exchange of houses as possible.

The Earl of GOWRIE

My Lords, we went a little bit wide of the order, as I shall try to show, but I feel that is legitimate because housing finance policy is a very problematical and controversial area, not only problematical and controversial as between the political parties but also in terms of British economic history and counter-inflation and pretty well everything else. There was one thing which the noble Baroness said with which I entirely agree and which really would be my text for a brief wind-up—that the issue here is inflation.

It would seem to me to be perfectly legitimate for us all, in Government or in Opposition, to be against high mortgage rates, but we would surely not wish to use the mortgage system as a way of beating inflation and therefore as an immense venue for funds. For instance, it would be quite wrong in a counter-inflation policy to isolate 5 million or so households in this country from monetary policy, and if you did so you would certainly undermine that policy. If you were running a pay policy you would not say "Everybody's wages are frozen except those who happen to be householders ". Already in the current climate, even at the highly-to-be-regretted 15 per cent. rate of mortgage interest—which does not, of course, come into effect until next year—mortgages are a highly desirable version of credit; you save rent as you pay your mortgage; the 15 per cent. is gross rather than net of tax, which brings the rate very considerably down, and you are able to borrow that way at much less than the going rate of credit which can operate in a counter-inflation policy which is based on tight money policies.

We all know how painful and how politically unpopular inflation is and also how painful and how politically unpopular counter-inflation is. Whether you decide to try to squeeze inflation out of the system by operating wage and price controls or decide to do it by tight money policies you are not going to insulate yourself as a Government, or the electorate generally, from the consequences of these policies. They are not particularly popular. But we are determined to squeeze inflation down, and I am sure the last Government were sincere in their desire to squeeze inflation down, but they were not very successful and we are determined to be more successful than they were.

Baroness BIRK

My Lords, I wanted to intervene at the point where the noble Earl was talking about exempting householders from the effects of inflation by making them a special class. I entirely agree with him. I was not arguing that, nor would I. What I was saying was that if the minimum lending rate had not been put up to 17 per cent. recently the mortgage rates would not have gone up as well. I am not asking that mortgages should be exempt; this would make nonsense. It is the whole way the financial policy is being carried out that I disagree with so fundamentally and which I think is causing this hardship and chaos.

The Earl of GOWRIE

Yes, my Lords, I agree with that, but the noble Baroness did say in her initial remarks that she was against inflation. High rates of interest are inevitably a consequence of inflation. You cannot protect the price of credit or the price of money from price rises which are occurring elsewhere. That is simple cause and effect in the economy. What we are concerned to do is to get Government spending down, because with high Government spending high interest rates are absolutely inevitable. But the noble Baroness and her friends have never ceased to ask for more Government spending or to criticise us in our attempts to stabilise Government spending. I realise that all counter-inflationary policies, as I said in a conciliatory way, are fairly contentious, and none of us can be protected politically or otherwise from the consequences of counter-inflation policies. If you do it through the wage control route it is quite unpopular, and if you do it by squeezing inflation through monetary measures you are fairly unpopular.

A noble Lord: But you cut income tax.

The Earl of GOWRIE

Well, to my mind that is quite consistent with a counter-inflationary policy. You must judge cuts in rates of income tax over a much longer period than one financial year. The rates of income tax operate over the life of a five-year Parliament, and, if you like, it makes it very difficult for any successor Government to put them up again. So we would hope that lowish rates of standard tax—and we would hope to take this even further—would be with us for a very long time; and if the noble Baroness and her friends wish to put up the rates of income tax I hope they will tell people fairly early on.

To return to housing finance, I think we would all be agreed that it would be impossible to protect housing finance from the inflation in the rest of the system or to make that area of credit so attractive—it is already substantially more attractive than other forms of credit—as to create an enormous price inflation and the rest in that direction. If I may come back to the order, as I said in my earlier remarks, the average building society advance in this country in the third quarter of 1979 was still less than £13,000. I think it is reasonable to expect that the vast majority of advances will continue to be well below the limit. Indeed, as I must point out in coming to the remarks of my noble friend Lord Selkirk, we are engaged in squeezing the inflation out of the system by bringing up this increase only in special advances to £25,000. There has been considerable pressure, and very understandable pressure, for us to go higher than that. I understand the GLC average price is £28,000. I believe my noble friend mentioned a figure of £23,000 as the average price for a house in the country as a whole.

The Earl of SELKIRK

My Lords, I said the average price for new houses in August 1979.

The Earl of GOWRIE

My Lords, I am most grateful for that correction. My information is that the average price in the GLC area is £28,000 and therefore, by raising the special advance limit to £25,000, we get a bit nearer to the average; but we are still aware that only 10 per cent. or less of all mortgage loans will be in this special advance region. The majority will be spreading the butter thinly over the population as a whole, and not, particularly in a time of high inflation, preferring the richer customer or the more expensive house over the needs of the poorer one. I think that is not so much Government policy as the friendly or mutual aid tradition of the building societies themselves.

If I may come finally and quickly to the points made by my noble friend, when he asked why the limit was not raised to £30,000, I gave the general policy, the counter-inflationary aspect. But, as I said, the building societies generally are not making many loans over £20,000 and very few societies are anywhere near the limit of 10 per cent, in relation to total advances. Indeed, I have been privately informed—I do not know whether there is a statistical basis for this and I say it with care—that the average of special advances is much nearer to 5 per cent.

The proposed increase will give the societies for whom the £20,000 limit is a constraint some room for manoeuvre, although it is room for manoeuvre still below the going rate of house price inflation. There is, of course, excess demand for mortgage funds at present and the societies are trying to spread what funds there are as widely as possible, often by lending a smaller proportion of the price of property. The limit may be increased again if that figure becomes difficult for the building societies to work to.

The noble Baroness asked me a number of questions and I have slightly to beg the indulgence of the House. Her questions were fair questions on the issue of mortgages and housing finance generally, but they did not really pertain to this order, which is connected with special advances rather than with the general level of mortgages. It is certainly true that increases in prices of any kind, including housing, have a direct connection with increased wage demands. However, the idea that one can, as it were, reduce wage demands by freezing prices, has been thoroughly discredited in the experience not merely of the last Government, but also of the previous Conservative Government. We should create in the housing field a massive set of bottlenecks or interventions if we tried to contain wage demands by freezing house prices or keeping mortgage rates artificially low. There would be an explosion of demand and no possibility of supply.

However, I agree with the noble Baroness that increases in house prices can lead to high wage demands. Therefore, I urge—as all Ministers are urging—those engaged in pay negotiations to measure very carefully the consequences of demands running ahead of productivity or what their companies can afford. The Government certainly mean what they say and have no intention of coming to the rescue governmentally of those firms, local authorities or whoever who grant pay rises in excess of their cash limits or what, individually, they can afford. My own feeling is that this is a very painful and necessary lesson for the British economy. It will be painful and it will be learned in the very near future.

Lord ROCHESTER

My Lords, I thank the noble Earl for giving way. I had not intended to intervene, but I did not realise that the discussion would centre so largely on inflation and counter-inflation. Perhaps I should have foreseen that that would happen. However, would the noble Earl agree that one relatively uncontroversial way of at least seeking to contain the problem would be to go for what I believe the West Germans call "concerted action"—making use perhaps of some such body as the existing National Economic Development Council—seeking to find, by agreement between the Government, employers and trade unions or their representatives, some agreed means by which wage increases could be limited so that they did not exceed, to the very considerable extent that they do now, increases in productivity?

The Earl of GOWRIE

My Lords, I think that that point is indeed rather wide of the Building Societies (Special Advances) Order. However, I agree that at this time of year, particularly when one is raising certain limits which were fixed on previous occasions—and raising them because of inflation, among other issues—it is perhaps fair for general counter-inflationary measures to be discussed. In my debate with the noble Baroness I certainly have not sought to avoid them. So, I would think that any kind of communications system which gets the lesson across is worth considering and is valuable.

My own instincts, perhaps more as an individual than as a Minister at this stage, are that Governments since 1964 have been exhorting and putting this message across with increasing frequency. People have a very shrewd idea of where their interests lie and they have tended not to accept the lesson because on the whole there has not been firm intervention or there has been giving in at one stage or other along the line with all Governments. I should have thought that the best way in which the lesson can be learnt is simply for people to run smack into the reality to which, after all, we are all subject.

Baroness BIRK

My Lords, I should like to thank the noble Earl for the polite and nice way in which he has dealt with the matter—although we disagree fundamentally—and for allowing the debate to widen beyond the order. Indeed, my Lords, I appreciate that. I have asked him two questions and I do not expect an answer now. If necessary, perhaps the noble Earl will write to me about the matter.

The first matter concerns the repayment period being increased. I know that there has been some talk of this, but I would like to feel that the Government were strongly urging building societies to increase repayment periods so that more people can take advantage of mortgages or experience less hardship. The other point I also asked him to consider was making the loan twice the annual salary instead of two and a half times. These seem to me to be two ways in which the burden on home owners could be lightened to a small extent.

The Earl of GOWRIE

My Lords, I am grateful to the noble Baroness for reminding me of those two questions. My understanding is that the building societies will allow borrowers to extend repayment periods wherever possible, and that they will also step in to do what they can to help hardship cases. The noble Baroness also asked me whether I would ask the building societies whether they would lend two times rather than two and a half times the salary. That is a matter for the societies themselves. It would be most imprudent, as well as improper, for a Government which are trying to face individuals and individual organisations with the realities of economic life, to give them much in the way of instruction as regards how they should or should not behave. We can all, of course, point to good behaviour and make encouraging remarks about it. However, I would not in any way wish to dictate to building societies as to what they should or should not do.

On Question, Motion agreed to.