BUILDING SOCIETIES
The Secretary of State for the Environment (Mr. Anthony Crosland)
With permission, Mr. Speaker, I will make a statement about the recent discussions between the Government and the building societies.
The Government's immediate objective is to increase the flow of funds available for mortgage lending, while holding the mortgage rate at its present level. The building societies, on the other hand, have argued in recent days that a sufficient net inflow of new savings cannot be assured except by an increase in the mortgage rate to above, and probably significantly above, the present 11 per cent.
In order to avoid this further damaging increase in housing costs, while yet making more money available for house purchase, the Government have offered to arrange immediate short-term loan facilities for building societies of up to £100 million at a rate of 10½ per cent. The Bank of England would make advances at the minimum lending rate, which is currently 12¼ per cent. The cost of meeting the difference—about £150,000 per month at present rates—would be met from my Department's Vote subject to Parliament's approval. We also undertook to arrange for a further £400 million to be available from the end of April, if circumstances then still required this, at an average rate of £100 million a month.
This initiative would, in the Government's view, meet the immediate major problem. It would help the societies to lend more money quickly for house purchase without imposing further financial burdens on home owners and home [column 441]buyers. The Government also believe that the present difficulties of the societies in attracting an adequate supply of funds will diminish as we succeed in our intention of reducing the level of interest rates generally.
The Council of the Building Societies Association considered these proposals at a meeting yesterday afternoon. It was not able to agree to accept them without a further discussion with the Government. I have therefore agreed to meet the association's representatives once again at five o'clock this afternoon.
Our proposals will, I believe, make a significant contribution towards stabilising both the cost and the flow of mortgage funds. I hope and expect, therefore, that following our further discussion with the association's representatives, the council will decide at its next meeting on 19th April to accept the Government's proposals and to recommend no increase in the mortgage rate.
Mrs. Thatcher
I am grateful to the right hon. Gentleman for carrying out his undertaking to make a statement to the House at the earliest opportunity. Does the right hon. Gentleman recollect that when my Government, about a year ago, announced a modest measure to help the house buyer, he and his right hon. Friends denounced it in no uncertain terms as a panic measure, as an expedient to carry the Government over the period of the county council elections, and as a step that made nonsense of the monetary policy announced in the Budget speech?
But I shall be kinder to the right hon. Gentleman. Is he aware that we accept that unless interest rates fall as far as Harold Leverthe Chancellor of the Duchy of Lancaster hopes—although I notice that they are rising on the other side of the Atlantic—some action should be taken to increase the flow of money available to the house buyer at a reasonable price? May I therefore, against that background, ask the right hon. Gentleman for answers to a few points?
First, why do the Government not allow the building societies to pay to the small saver the same rate for his money as they—that is the Government—are willing to pay for the money that they need? That would surely be the way to retain the deposits with the building societies. [column 442]
Secondly, in case the right hon. Gentleman should attempt to answer that by reference to the mortgage rate—and I am sure that he is concerned about that—may I ask why, as recently as a fortnight ago in the Budget, the Government made it more difficult for the building societies to keep the mortgage rate down by increasing the composite rate of tax which the building societies have to pay on behalf of the lender?
Thirdly, when are the loans repayable, and upon what terms would the second £400 million be lent? There was nothing about that in the right hon. Gentleman's statement. Assuming that the whole £500 million is taken up and not repaid this year, what, on the ordinary Treasury conventions, would be the change in public expenditure and the change in the net borrowing requirement in the current year?
Finally, will the Government please give an assurance that they will not place constraints on the societies as a condition of the loan that would prevent them from adapting their interest rate structures and their methods of operation to the conditions of a changing world? We agree that they would need to adapt. We believe that they should be free to do so.
Mr. Crosland
I add that up as being seven separate questions. I shall be as brief as I can in replying.
First, on the question of the famous £15 million of almost exactly a year ago today, I withdraw nothing of what I said in criticism of that proposal. Compared with what we are proposing, it was non-repayable; it was far more costly to public funds; it was indiscriminate and, incidentally, it failed totally in its purpose at the end of the day. It failed entirely in its purpose, because the object, as the right hon. and learned Member for Hexham (Mr. Rippon) would agree if he were here, was to prevent a rise in the mortgage rate to 11 per cent., and that rise occurred within three months of the £15 million subsidy.
Secondly, it is undesirable to increase the investment rate because this would involve increasing the mortgage rate.
Thirdly, the right hon. Lady asked what was the effect of the Budget. She picked out only one of a number of [column 443]Budget measures which affect the building societies. For example, she made no reference to our action on annuity bonds. She made no reference to the effect on building society inflow of the reduction of bank interest on loans and to other features of the Budget which help the building societies.
Whether the effect of the Budget on balance was favourable or unfavourable is a matter of a great deal of argument, certainly between the Government and the building societies, and even more generally than that. But no one can say that the Budget did the societies a great deal of harm.
Fourthly, on the question of repayment, the broad position is that the building societies will repay this money, either as a change in the interest rate position increases the net inflow or as other sources of borrowing are found. I propose to discuss with them this afternoon in detail the precise arrangements for repayment.
Fifthly, the terms of lending of the next £400 million will be discussed in the light of the interest rate position at the time. I hope that this further £400 million will not be required. I hope that before then we shall have found new sources of borrowing or that the interest rate position will have moved strongly in favour of the building societies.
Sixthly, I was asked about public expenditure. The facility arranged through the Bank of England will not add to public expenditure or to the public sector borrowing requirement. The facility would be made available by the Bank of England banking department, which is, of course, part of the banking sector and not part of the public sector. The only addition to public expenditure would be the—if I may use the word—trivial sum of £150,000 a month to cover the interest rate differential.
Finally, will we constrain the building societies from adapting their interest rate policies to changing conditions? Indeed, far from it. We believe that a great deal of adaptation is needed.
Mr. Walter Johnson
Is my right hon. Friend aware that the hedging by the building societies on this extremely generous offer by the Government will be seen [column 444]by the 4½ million people buying their own homes as symptomatic of the behaviour of the movement which has been responsible for the situation we face at the present time?
Furthermore, will my right hon. Friend take account of the plea that I have been making in the House for the past two and a half years to refer the activities of the building societies to an independent inquiry? Why are there over 100 building societies supposedly in competition with each other, sometimes 10 in one street, all charging the same rate? Why should not the building societies in good times make provision through their own stabilisation fund?
Mr. Crosland
As regards the question whether the building societies have been hedging, as I am about to meet them in one hour's time I prefer not to comment at this stage.
Regarding the second and third questions, I would like to make it clear to my hon. Friend—I know his views in this matter—that what I am discussing this afternoon and, indeed, will be discussing with the building societies, is basically a holding operating relating to an immediate crisis and an immediate threat. My hon. Friend is aware that in opposition I was strongly critical of the methods that we have in this country both of raising and of lending funds for private house purchase. I was a strong supporter of the idea of a stabilisation fund—incidentally, this is a move in that direction—but what I am proposing to the building societies in these discussions does not rule out—far from it—the necessity for a long, hard look at the question of finance for private house purchase.
Mr. Tyler
Is the right hon. Gentleman aware that we on this bench are genuinely grateful to him for coming to the House before the recess to make this statement? We are aware of the dilemma which he faces and have great sympathy with him in this situation.
Is the right hon. Gentleman also aware, however, that we are anxious that he should attach strings? There has been criticism in advance of this statement that he was, apparently, prepared to attach strings to a subsidy of this kind. We on this bench at least wish him well in this respect. We recognise that last year's [column 445]£15 million went down the drain and we do not want that to happen again.
However, will the Secretary of State confirm that now is the time to exercise some influence over the building societies' lending policies? He will recall that we have suggested over the years that equity mortgage schemes, index-linked schemes and low-start mortgage schemes should be used. Is it not true that as a representative of one of the minority parties in the House, some attention should be given to the views of the absent Members——
Mr. Speaker
Order. I must remind the House that the Secretary of State has an engagement at five o'clock. That really is enough!
Mr. Crosland
If I may say so, Mr. Speaker, your courtesy and consideration grow year by year. I am much obliged for this novel form of protection from over-lengthy questions. I am grateful to the hon. Gentleman for his sympathy and I shall be brief in answering.
I must make it clear that the one string, if that word is to be used, that is attached to this as the string that matters is that, if the building societies accept this offer, the mortgage rate is held at 11 per cent. If the mortgage rate is not held at 11 per cent., then the deal is off—just like that.
The other questions that the hon. Gentleman raised, indexation and the rest, are matters for longer-term study.
Mr. Frank Allaun
If the building societies prove obstructive despite this further massive subsidy, because such it is, will the Secretary of State lend instead to the local authorities? They make 100 per cent. loans, often to people who cannot obtain them from building societies. Secondly, is my right hon. Friend aware that many of us feel that these funds should be provided by the big four banks out of the £640 million profit they have made; and, if they cannot be provided out of those profits, they should be provided, at low interest rates, out of the banks' vast resources.
Mr. Crosland
If the building societies at their meeting on 19th April were to reject this offer, it is clear, to put it moderately, that the atmosphere would be somewhat darkened and relations [column 446]between the Government and building societies would be somewhat strained. I am putting this very moderately indeed. Nobody could possibly suppose that relations will not be influenced between the Government and the building societies movement if the societies were to turn down an offer of £500 million.
As to local authority mortgage lending, I am aware of the point. The local authorities are not, in fact, in the same situation as the building societies, either on the borrowing side or lending side. But we have my hon. Friend's point in mind. I take my hon. Friend's point in mind. I take my hon. Friend's point about bank profits, but we wanted to find the money from the source from which it was most easily and quickly available.
Mr. Ridley
While any relief for house purchasers' mortgage interest payments will be welcomed, can the right hon. Gentleman say what effect the £500 million, if it is all taken up, would have upon the money supply? Will he also say whether this would not result in a further increase in inflation, particularly of house prices?
Mr. Crosland
No, I would judge not. I would judge that the sort of figure we are discussing, say £100 million per month—hopefully not required for the whole of the five to six months period—is a rate of additional lending sufficient to stem the recent net outflow from the societies, and also to increase by a reasonable amount the funds available for new house purchase. But it is not a sum such that it would be likely to recreate the appalling inflation of house prices that was created by the gross overlending of 1971 and 1972.
Mr. Cant
As the House is aware, the societies are bound to be influenced by the strong attitude adopted by my right hon. Friend. Will he, therefore, make the point to them that, if they accept this £400 million or £500 million over the suggested period, they lend it to people who are purchasing houses for the first time, and only to people purchasing houses for, say, less than £10,000 to £12,000?
May I also make the point that it would greatly help the supply of funds to building societies—a short-term, temporary measure—if my right hon. Friend would raise the amount from £10,000 to £25,000 on which banks are allowed only to pay [column 447]9½ per cent. gross? Would he also review local authority practices regarding high interest rates with yearling bonds?
Mr. Crosland
I should like to consider all my hon. Friend's points. I would, however, stress that this has had to be a rapid holding operation with two essential objectives. The first is to get private house building off the ground, and the second is to give immediate relief to home owners and buyers threatened by perhaps 12 per cent. and quite probably 13 per cent. as a mortgage rate. Many of my hon. Friend's points will be looked at in the longer-term review.
Mr. Tugendhat
Is the right hon. Gentleman aware that the whole country will wish the Government well in their efforts to bring down interest rates? However, in the light of what is happening on the other side of the Atlantic, and in the light of the extreme dependence of the sterling exchange rate on attracting money into the country, it is doubtful whether the Government will succeed in doing so. In the circumstances, would it not be better to devise a subsidy system that at least enabled the building societies to offer to investors a rate which would enable them to withstand any adverse trends in interest rates?
Mr. Crosland
I hesitate to contradict anything that hon. Gentleman says, as he wrote an extremely perceptive review in the Financial Times of a book which I recently published.
Regarding the behaviour of interest rates, we have seen encouraging signs in this country in recent days—the release of special deposits by the Bank of England last week, the reduction in the minimum lending rate from 12½ per cent. to 12¼ per cent., and, I was glad to note, the announcement by the National Westminster Bank this morning that it would reduce its base rate by ½ per cent.
It is true that we are acting on the supposition that we shall be successful in bringing interest rates down. If we are proved to be wrong, or if we are unable to find new sources of borrowing for the building societies, it is clear that the entire question of the flow of mortgage lending will have to be reopened.
[column 448]Mr. M. S. Miller
Is my right hon. Friend aware that the building societies' lukewarm attitude to the Government's prompt and generous offer is also an indication of their not facing up to their responsibilities to the millions who are in difficulties at present? Is this not the time for the Government to look again at the building societies' set-up, since the words themselves are misnomers? The societies build nothing. They are money-lending agencies whose function could well be performed by other agencies. I would ask him to take up the point made by my hon. Friend the Member for Salford, East (Mr. Allaun), that local authorities could disperse money in a much more even-handed and equitable way, and more cheaply than can the building societies.
Mr. Crosland
I do not think that the building societies deserve quite the strictures which my hon. Friend has applied to them. We are not discussing the long-term future of the supply of funds for private house purchase at this juncture. We are discussing a holding operation to get more money quickly into house purchase and to hold the mortgage rate at 11 per cent.
Mr. Allason
Does the right hon. Gentleman agree that 11 per cent. is much too high for existing borrowers and creates intolerable problems for them, and, equally, that 11 per cent. is too low for lenders and he is therefore having to come to their rescue? Why has the right hon. Gentleman chosen 11 per cent.? Why not go back to 9½ per cent., which was the figure which the previous Government attempted to adopt as a holding operation? The Minister is now doing a holding operation 1½ per cent. higher. Will the right hon. Gentleman accept my congratulations on his efforts, particularly as I am the only backbench Member who congratulated the previous Government on their holding operation?
Mr. Crosland
I should like, if I may, in return to congratulate the hon. Gentleman on his audacity. We inherited a rate that went up from 8½ per cent. to 11 per cent. and which threatened to rise to 12½ per cent. or 13 per cent., and it may be taken as a reasonably successful first measure to hold it to 11 per cent. No [column 449]doubt further successful operations will be carried out by the Government as the years unfold.
Mr. Spriggs
Is my right hon. Friend aware of the extent of the serious poverty created in many families as a result of increased mortgage rates over the years? Is he aware of the large numbers of people who, having started to buy their homes, are having to sell them because they can no longer meet the repayments?
Mr. Crosland
Yes, Sir, I am aware of that and also of the acute hardship that has been caused to those who bought at the inflated prices two or three years ago and found the rate increasing inexorably step by step from 8½ per cent. to 11 per cent.
Sir Harmar Nicholls
Ought it not to be remembered, on behalf of the building societies, that they want to find an answer to this question, and that while the Minister can talk about a holding operation they have to sign the deed and be responsible for the contract that follows? The House of Commons ought not to ignore the strings. To ask building societies to guarantee their position at 11 per cent. when they do not know all the circumstances that will surround the money market is perhaps asking them to commit themselves too deeply.
The right hon. Gentleman also said that if the building societies take up his offer of an additional £400 million, when it is adjudged that circumstances have been reached when it can be repaid, it will have to be repaid. Who will decide when those circumstances have arrived? Will they be mutually agreed before the money can be withdrawn, or will the Minister retain the right to decide when circumstances are such that it ought to be repaid? If it is a one-sided arrangement, I can well understand the reluctance of the building societies to commit themselves to long-term lending with the short-term money that may come from the Government.
Mr. Crosland
I shall be very surprised if, at the meeting at five o'clock, we do not reach complete agreement on the terms of the repayment. I am speaking in advance, but I do not expect any difficulty. [column 450]
As to the 11 per cent., I must make it clear that we cannot exact from the building societies a guarantee that they will permanently keep their rate of interest at a certain figure. Obviously, all that we can say is that if they wish to have this £500 million they must hold the rate at 11 per cent.
Mr. Ashton
Is my right hon. Friend the Secretary of State aware that over the last few years insurance companies and pension funds have ploughed about £3,000 million into property building, most of which has gone to finance useless empty office blocks and empty renewed city centres? Can my right hon. Friend not take specific measures to insist that these holders of large funds plough their money into building societies to help to build more houses for ordinary people?
Mr. Crosland
I am very much aware of the point that my hon. Friend makes—indeed I made it with him when in Opposition—but that is part of the longer-term study, a major portion of which will be the examination of possible alternative sources of funds for the building societies.
Mr. Emery
Will the right hon. Gentleman take into account the fact that the building societies expect to have a net outflow of about £15 million this month? As their requirements are about £160 million, that means that they will be meeting only about 50 per cent. of their requirements. Unless they raise their 7½ per cent. saving rate, they argue that they will not be able to meet even the short-term requirement which the hon. Gentleman suggests the loan will go to meet. Why, therefore, does he want to restrict their saving rate to 7½ per cent. when the building societies feel it is essential, in order to attract money, that they should put up that rate?
Mr. Crosland
For the very simple reason that if they put up their investment rate they would be bound also to raise their mortgage rate well above 11 per cent., unless the Government were to step in with an indiscriminate and wasteful flat-rate subsidy, or a reduction in taxation, which amounts to the same thing. We strongly criticised that method of doing it a year ago, and we have not changed our minds.