Year of Opportunity for Building Societies
By LEONARD BOYLE CI AN anybody remember when the times were V./not hard and money not scarce?' Emerson may not have been addressing an audience interested in building societies when he uttered these words, although, at first sight, they may be thought to reflect the circumstances under which building societies have been working in recent years. Times have not been easy. Indeed, why should they have been? The country has been passing through a difficult period: we have had recurring financial crises and building societies, with their twofold purpose of encouraging thrift and making loans available for people desirous of owning their own homes, mirror the economic and monetary conditions prevailing.
Nevertheless in the twelve post-war years up to the end of 1957 the net savings which people entrusted to building societies increased by £1,500 million and today societies have on their books four million investors with an average holding of about £560. It is the savings of these four millions that are enabling more than two million people in this country to purchase the houses in which they live.
The figures for 1958 are not yet available although when they become known it may well be that the year has proved more satisfactory than' at one time appeared likely. For the first quarter of the year, societies were faced with a 7 per cent. Bank rate which meant that several competing forms of investment were more attractive to potential investors. When Bank rate was increased to 7 per cent. in September, 1957, most building societies maintained their lending rate at 6 per cent. and their share rate at 31 per cent. Industrial bankers, whose rates vary fairly closely with Bank rate, were offering 8 per cent. and 8f per cent., local authority mortgages were available at 7f per cent. up to seven or ten years with temporary money at seven days' notice about 7 per cent. and joint stock bank deposits at S per cent. Small wonder that building societies had great difficulty, not only in attracting new investments, but in holding the investors' accounts they already had. It speaks well for the confidence shown by the public that in this difficult first quarter of 1958 the net inflow of shares and deposits to societies was about £16 million. During the remainder of 1958, when there were subsequent reductions in Bank rate down to 4 per cent. and a corre- sponding lowering of interest rates on those forms of investment which are closely linked with Bank rate, shares in building societies proved more attractive, and many societies found in the closing months of the year a very welcome accretion to their funds in spite of the fact that the National Savings Movement has continued to offer very attractive rates on Savings Certificates and Defence Bonds.
What are the portenti'for 1959? The building societies are looking forward to this year with the greatest confidence. This confidence is gained not only from the experience of past years and the sure knowledge that the service , and stability offered by societies has attracted to them over four million investors, but by the well- founded hope that during 1959 the necessary legislation will be passed whereby societies with assets in excess of half a million pounds and possessing certain proportions of reserves and liquid funds will be able to apply to the, Registrar of. Building Societies for their deposits to rank as trustee securities. This acknowledg- ment by the Government of the soundness and security of deposits with building societies is long overdue and is eagerly awaited. It is the fervent hope of many boards of directors and executives that the achievement of trustee status will prove a red-letter day in the movement's history. It opens up another potential source of investment income, and trustees of personal estates and also of institutional or organisational funds will be attracted, no doubt, by the rate of interest offered by societies combined with the absence of depreciation and the ease with which the money can be withdrawn.
The Bill provides that after a society has applied for and obtained trustee status for its deposits, it can, if it so desires, enter into an agreement with the Minister of Housing and Local Government to borrow money from the Exchequer to finance mortgages on private houses built before January 1, 1919, where the valuation is £2,500 or less. These loans will be made by the Government at 4- per cent. less than the ruling rate for mortgages recommended by the Building Societies Association. At present this rate is 6 per cent. and therefore the Exchequer would charge 51 per cent. The loans will be for twenty years and will be repayable by the societies half-yearly on an annuity basis. Variations from time to time in the rate recom- mended by the Association will be reflected in the rate charged by the Government and the total amount to be lent by the Exchequer to any one Society will not exceed 20 per cent. of the Society's deposit and share capital. Estimates vary as to the amount which societies are lending on pre-1919 houses but it is probably between £40 million and £50 million a year. When the Bill becomes law, a large proportion of this sum should be available ,to -finance mortgages on post-1919 houses although even then it seems doubtful whether building societies will be able to satisfy completely the demand for mortgages, as those societies taking part in the Govern- ment's scheme undertake to offer any credit- worthy" applicant a' 95 per cent. advance on houses built between 1919 and 1940 provided the security ' is adequate and provided, also, the Society has funds available. This means that the additional £40 Million or £51:1 million may be partly utilised in making bigger loans rather than more loans.
For nearly 200 years building societies have pioneered the way in utilising the savings of the nation to house the nation. Throughout this long period the priMe concern has been to hold the scales as evenly balanced as possible between investors on the one hand and borrowers on the other, and this will continue to be in the fore- front of the movement's policy. The year 1959 will undoubtedly be one of great opportunity and if history repeats itself, building societies will not prove slow in taking advantage of it.
A share or deposit investment in a reputable building society will continue to be attractive to the small investor who will have the .knowledge that there is no risk of depreciation, .that his, money will be available at par when he requires it, that he wiU have no liability for income tax on the interest and that whilst his savings are in the hands of the society, they are being utilised for the laudable purpose of helping someone to purchase his own home.
Perhaps at the end of the year, societies will have such a surplus of funds that, were Emerson able to put his rhetorical question to them,' they. would be able to answer in the affirmative.
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