THE ECONOMICS OF BUILDING SOCIETIES Also by T. J. Gough FUNDAMENTALS OF MANAGERIAL ECONOMICS (with S. Hill) THE ECONOMICS OF BUILDING SOCIETIES T. J. Gough © T. J. Gough 1982 Softcover reprint of the hardcover 1st edition 1982 978-0-333-30029-9 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1982 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world ISBN 978-1-349-05675-0 ISBN 978-1-349-05673-6 (eBook) DOI 10.1007/978-1-349-05673-6 Contents Preface vii Acknowledgements Vlll 2 Objectives 2 2 Savings 15 3 Mortgages 30 4 Equity between Members 47 5 Interest Rates 65 6 Efficiency 81 7 Concentration and Mergers 102 8 Branches and Advertising 118 9 The Housing Market 132 10 Change and Reform 147 Postscript 158 References 162 Index 171 v Preface The aim of this book is to examine the economic operation of building societies in the United Kingdom. Its theme is largely 'microeconomic', analysing the actions of the societies as firms, but also deals with their wider role in the economy. It is a highly individualised interpretation and brings together published work of the author which has appeared in various journals over recent years. It also presents new features which have not been published previously - notably on interest rates, efficiency and house prices. Recent years have been characterised by the building societies being subject to increased criticism. This adverse commentary has largely been fragmented and lacking an overall dimension. This book attempts to deal fairly with such criticism, putting the comments in the words of the commentators and providing the societies' response. An overall evalu ation is then made in the light of the economic framework within which the societies operate. A sense of perspective is therefore added, and hopefully a degree of objective appraisal. The aim of the book is that it should be able to be understood by a wide cross-section of people - e.g. those in the building societies themselves, investing and borrowing members, interested persons in related industries or financial institutions, as well as professional economists, financial experts and politicians who will be actively involved in the future of the building societies. The author offers this as a platform for constructive and objective debate over the future economic role of this major British financial institution. It is much to the credit of the societies, and the Building Societies Association, that such a debate can be conducted with the aid of the mass of reliable information which is readily available. vii Acknowledgements Whilst this work is very much a personal viewpoint, it nevertheless draws on published works written jointly with colleagues, Mr T. W. Taylor and Mr S. Hill, both of the Department of Applied Economics at UWIST. My thanks go to them in indirectly influencing the content and direction of this work. I also wish to thank Mrs J. Sparks, Librarian at the Friary Library, UWIST, for her considerable help in tracking down many of the references used in this book. My publishers and I are grateful to the following who have kindly given permission for the use ofc opyright material: the Bank of England, Economics Division, for the data from the Bank of England Quarterly Bulletin (September 1979); the Building Societies Association for the data from various sources, and the extracts from the report 'Building Societies and the Savings Market', May 1979, prepared by the British Market Research Bureau Ltd; the Building Societies' Gazette for the data from articles by Professor Glyn Davies and Martin J. Davies; the Controller of Her Majesty's Stationery Office for the tables from Economic Trends Annual Supplement 1980 (CSO), Reports of the Chief Registrar of Friendly Societies and Housing and Construction Statistics; and the Equal Opportunities Commission for the extract from the report 'It's not your business, it's how the Society works' (1978). Finally, my thanks go to Mrs Margaret Aven, Mrs Barbara Williams and Mrs Sadia Matthews for their speedy typing of the manuscript. T. J. G. viii 1 Objectives The rate of growth of the Building Society Movement ... has been so different from all previous experience in degree as to make the movement almost different in kind. From being a mere ancillary feature in the national economic life, it is now in the main stream of its development. For, prior to the war it was at least possible to conceive the economic development of the community proceeding, in the absence of such an institution, along alternative lines. It was at least possible, for example, to conceive that the system of private mortgage could have been extended or amplified to meet the actual and gradually growing needs of the owner-occupiership of dwelling houses. But today the situation is essentially changed, for the elimination of this economic agency would have made a profound difference, and not a mere casual change, to our economic life. It is in this sense, therefore, that the movement, while exhibiting no par ticular changes in form, has enjoyed are-birth. The above quotation might at first sight seem to allude to the growth of the building societies in recent decades. The 'war' referred to one might guess, with justification, to be the Second World War. The quotation in fact comes from a statement made in 1927 by Sir Josiah Stamp! and the war he refers to is the Great War. The quotation serves to illustrate the great importance building societies had already reached in the 1920s; they were obviously regarded then as an indispensable institution. Their phenomenal growth since that date, more especially in the 1960s and 1970s, has again affected another sea-change; perhaps we may call it a second re-birth. It is not the purpose of this work to analyse the history of the building society movement. This has already been done more than adequately by several writers.2 What it does seek to do is to provide a modern interpretation of the role of this major financial institution - to analyse and explain its functioning - and to speculate on reforms or changes that might be envisaged over coming decades. Yet the historical perspective cannot be completely ignored. The 2 2 The Economics of Building Societies societies'origin as self-help co-operative institutions is still to the fore in tenns of the image they present to the public. Bellman3 in the 1920s defined a building society and its role as follows: A Building Society is a combination of investors and borrowers operating under a measure of Government control to promote the ideals of thrift and home ownership. The investors - who are either member-shareholders or merely depositors - supply the funds from which house purchase loans are made. The difference between the rate of interest received from the borrower and that paid to the investor, represents the margin which enables a Society to meet its management expenses - a very modest figure in most cases - as well as to build up and maintain adequate reserves. The working basis of an incorporated and penna nent Building Society resembles that of a bank, from which, however, it is widely differentiated in constitution and objects, being essentially co operative or mutual in principle and existing solely for the benefit of members (p. I). Such a role is reiterated in the Building Societies Act of 1962 as follows: 4 The purpose for which a society may be established under this Act is that of raising, by the subscriptions of members, a stock or fund for making advances to members out of the funds of the society upon security by way of mortgage of freehold or leasehold estate (Chapter 37, Part I, Section 1(1)). Thus the building societies are traditionally believed to be mutual self help institutions which specifically do not make profits. Indeed the word 'profit' is never used and is specifically excluded in the annual accounts presented by each society. Instead the synonym of 'surplus' is used, and this confonns to the tenn used in the Building Society Act of 1962 where 'funds of the society which are not immediately required for its purposes' are designated by the tenn 'surplus funds' (Section 58(4)). It is this non-profit-making basis which seems to account for the general lack of enquiry into the efficiency ofbuiIding societies. While many industries have been subject to scrutiny as to the conduct of their affairs (in relation to pricing policy, level of profits, suppression of competition), the building societies have generally not come under the spotlight of official enquiry. Exceptions can be found to this, such as the National Board for