As those Deputies are of course aware, there were obvious reasons for the increase about three months ago in mortgage interest rates. Like all Deputies who are sincere about the matter, I regret the fact that building societies were forced by international market conditions to increase to 9 per cent the interest rate they had to offer to depositors, thus necessitating a consequential increase in their mortgage interest rates from 11.5 per cent to 14.15 per cent with effect from 1 December last. As the Minister with special responsibility for housing, I am naturally concerned at the effects of these interest rates increases on existing and intending borrowers and purchasers.
Because of the tone of the motion before the Dáil, I feel it is necessary to place clearly on record the cause of the action on interest rates last December by building societies. We in this Government, as with our predecessors in office, cannot stabilise interest rates here while we continue to be aligned with the monetary system of the United Kingdom. The action of the British Government in raising their minimum lending rate in the hope of easing thereby their inflation problems, started the usual chain reaction of higher bank rates in the United Kingdom, thus forcing our banks to follow suit or else to face the outflow of deposits to British banks. The building societies could not escape involvement in these arrangements. If they did not offer higher rates to investors not alone would their net inflows dry up but existing investors could decide to avail of the higher rate of return offered by other lending agencies and start withdrawals.
Building societies are independent financial institutions which offer savers, both large and small, an opportunity to invest their money. They are essentially mutual institutions in which many members invest their savings with a view to getting a loan from the particular society with whom they have invested at some future date for the purpose of purchasing a house. However, it is also a fact that much of the funds invested with the societies comes from people who are interested in the rate of return they will get on their money. Societies do not make profits in the accepted commercial sense. As mutual institutions, their aim is to provide a margin between the rate of interest they pay to the investor and the rate they charge the borrower, which, after expenses and taxation, is sufficient to leave a small surplus to maintain adequate reserves for the protection of their investors.
Building societies are unusual financial institutions in that they manage to borrow short and lend in the long-term. Investors can withdraw on demand or at short notice, but mortgage loans are advanced for periods of 20 to 25 years. As independent financial institutions, societies are obliged to compete with other such institutions, in particular the banks, both to retain the funds already invested with them and to attract further new funds. To do so they must offer an investment rate at least as attractive, and preferably more attractive than the other institutions.
Any substantial withdrawal of funds would have disastrous effects on the operation of the societies and the private housing programme of which they are the major support. In 1977 societies supplied £119 million or 70 per cent of the total amount lent by all lending agencies, £171 million for private housing. In 1978 they lent over £147 million, or 66 per cent of the £223 million advanced by all lending agencies to finance the purchase of private houses. Between 1971 and 1976 building societies contributed nearly £600 million to private house purchase financing in Ireland —nearly 50 per cent of the total amount provided by all lending agencies in that period.
After consideration of the situation the societies who are members of the Irish Building Societies Association decided to increase the interest rate paid to investors from 7 per cent to 9 per cent as from 1 December 1978. This gave rise to a consequent need to increase the mortgage rate to 14.15 per cent. I want to emphasise that the increase in the investment rate does not restore the differential over that offered by the banks to anything like it has been.
The societies have nearly always enjoyed an advantage of anything from ½ per cent to 2½ per cent over the minimum bank deposit interest rates. Bank deposit rates were increased by 2 per cent on 16 May 1978, but building societies increased their investment rate by 1½ per cent as from 1 June. Bank deposit rates were further increased by 1 per cent with effect from 27 June but building societies did not then increase their rates. Banks increased their deposit rates by a further 2½ per cent with effect from 15 November last. As from 1 December 1978, the societies' differential over the banks' deposits under £5,000 has been only ½ per cent while for deposits of between £5,000 and £25,000 the societies' rate is ½ per cent below the bank rate. For deposits over £25,000 there is now a margin of 1 per cent in favour of the banks as against the societies.
I must make it clear that there is no power available to me in the Building Societies Act, 1976, to interfere in the setting by societies of their interest rates. This is so for the very good reason that it was decided when the Act was being drafted that societies themselves are the best judges of the appropriate interest rates necessary to generate sufficient inflow of moneys to enable them to meet their mortgage commitments. I agree that this is the right approach. They have always acted capably and responsibly in the matter and I am satisfied that they acted responsibly in this instance.
Criticism has been voiced about the fact that the societies have increased their mortgage rate by considerably more than 2 per cent. The consequential increase has to be higher in order to compensate the societies for the additional amount they must pay as tax on behalf of investors who receive their interest payments free of tax. I am aware also that societies have been criticised on the grounds that their operating costs are too high in comparison with their counterparts in the United Kingdom and also because they are alleged to be making big profits here. In this regard I would point out that Professor Cleary who carried out an in-depth investigation of building societies in this country for the National Prices Commission was satisfied that operating costs were not unreasonably high. The societies themselves are well aware of the need to keep their costs at a reasonable level and indeed their management expenses are low in comparison with those of other fiancial institutions in the State. This is particularly laudable in view of the rapid growth and expansion of the societies, particularly in recent years. Assets have increased from £87 million in 1970 to £600 million now, a sevenfold increase. They are now paying nearly three times the number of loans they paid in 1970.
In so far as the profit criticism of the societies is concerned, I have already said that building societies are not profit-making institutions in the commercial sense, as are other institutions. Their objective is to achieve a surplus sufficient to maintain an adequate reserve. In the context of their rapid growth in the past decade, the societies' reserves have had to be considerably increased in order to be adequate. It is well to place on record the fact that out of the interest of £14.15 paid on each £100 of mortgage finance borrowed, it is calculated that £9 is payable to investors, £2.92 is paid as income tax on behalf of investors, management expenses account for £1.28, leaving an undistributed surplus of 95p which, after tax, leaves only 66p for reserves.
I should now like to refer back to May 1973 when the National Coalition Government introduced a subsidy for building societies. At that time the inflow into societies was low and falling rapidly. The building societies decided to increase the interest rate offered to investors by 1 per cent. This would have necessitated an increase of at least 1¼ per cent in the mortgage rate. The Government at that time decided to give a temporary 1 per cent subsidy to societies to enable them to pay investors an extra 1 per cent and hold the existing mortgage rate of that time.
The subsidy was subsequently reduced to ¾ per cent in August 1975 and was abolished in February 1976. That subsidy, and this should be emphasised, was to encourage investment with the societies and while it indirectly had the effect of reducing the mortgage rate, its primary purpose was to attract more money into building societies. This inflow of funds to societies had been falling dramatically at that time. The situation now is different in that inflows into building societies are at an exceptionally high level.
Before I leave the question of interest rates payable on house purchase loans, I want to refer to the recovery which has been taking place in the case of the SDA loans schemes operated by local authorities. This scheme had been practically eliminated under the National Coalition Government which, between September 1973 and June 1977 had made no increase in the loan and income limits. Only £17 million was provided for SDA loans under that Government's last budget in 1977. The present Government increased the income limit by 50 per cent and have doubled the previous maximum loan available to SDA applicants.
Loan payments increased to £26 million last year and provision has been made for an expenditure of £43.5 million this year. The proportion of the mortgage market served by this loan scheme rose from 10 per cent in 1977 to 14.4 per cent last year. The interest rate on money payable by local authorities on money borrowed from the Local Loans Fund to finance the scheme rose from 11 per cent to 12 per cent as from 1 December last, hardly what one could justifiably term a "brutal" increase, as the motion indicates.
The second part of the motion refers to "the steep increase in house purchase prices". As I mentioned earlier, this topic was dealt with very fully in the Seanad last week and I do not intend to cover the same ground again at any great length on this occasion.
Deputies opposite tend to base their assessment of trends in house prices on an unqualified use of statistics set out in Tables 19a and 19b of my Department's quarterly bulletin. I have had occasion to warn the House previously about the danger of this approach. The bulletin itself states quite explicitly that though the statistics of house prices are useful as indicators of general trends in average house prices over a given period, they cannot be accepted as completely accurate records of housing costs at any given time.
For example, the houses concerned are not necessarily comparable from quarter to quarter or from area to area throughout the country. Furthermore, the average prices recorded can be influenced from quarter to quarter by changes in the distribution of loan approvals amongst lending agencies.
Subject to that reservation, over the four quarters of 1978 the rate of new house price increases recorded in the bulletin fell from 11.7 per cent in the three months to 31 March 1978 to 8.4 per cent in the June quarter, to 3.4 per cent in the September quarter of 1978 and I am glad to say that the bulletin for the quarter ended 31 December 1978 which will be published shortly, will record a slight reduction in average prices during that period. It means that over the full year 1978, average new house prices, as set out in the bulletin, rose by 24.8 per cent—undoubtedly a substantial increase but one which was well below the staggering increase of 36 per cent which occurred during the Coalition's Government's first year of office in 1973-74.
House prices have been rising constantly—not just over the past year or two, but for decades past. They have increased more steeply over the past year in other European countries than in Ireland. The fact that we have managed to bring the rate of increase under control is due to the awareness by the Government of the trend in prices and because we were concerned about the difficulties to which, if allowed to continue, it would give rise in the case of persons of modest means. The Government have kept the situation under review and took the necessary initiatives to deal with it. This process of control was not an emergency operation begun early last year. Measures to control the escalation in house prices were put in hands soon after we resumed office in mid-1977 as part of a wide-ranging package of actions in relation to housing.
When we took over Government again in July 1977 we soon discovered that the controls on new house prices, as operated by the certificates of reasonable value system, which the previous Fianna Fáil Government had introduced in 1973, had not been strengthened, contrary to what should have been expected after a period of rapid price escalation. Indeed, the controls had been weakened by the drastic curtailment in 1976 of eligibility for new house grants.
In those circumstances the certificate of reasonable value system was immediately extended to all grant-type new houses provided for sale and also to flats. Previously houses in schemes of three or fewer and all flats were exempt from the controls. The effect of this move, combined with the liberalisation of the schemes of new house grants, was to increase from approximately 40 per cent to 70 per cent the proportion of new private houses brought within the scope of house price control.
Further positive action was taken by the Government last year. Evidence was becoming available that the rise in house prices was being influenced by builders moving out of the construction of modestly priced houses eligible for grants, and for which certificates of reasonable value, were therefore required, and into the higher priced market where profits were greater and where they would not be subject to the system of house price control, as in the more modest house market.
To deal with this situation the Government decided that for a trial period at least 60 per cent of the total funds available to building societies for mortgages should be allocated in providing loans not exceeding £13,000 each and that at least a further 20 per cent of their available funds should be allocated in providing loans of between £13,000 and £16,000.
The societies were also informed that certificates of reasonable value should be furnished by all applicants for loans not exceeding £16,000 for the purchase of new houses. The Government's decision was intended to ensure that the money available should finance the purchase of the greatest feasible number of reasonable priced houses and that all purchasers of new houses with loans under £16,000 would be assured of getting reasonable value for their investment. Since we introduced them, these moves have already produced significant results in so far as the trend in average gross house prices is concerned.
In the case of previously occupied houses the average price of houses for which loans were approved by the main lending agencies increased by 17.8 per cent as between the last quarter of 1977 and the end of 1978. I am particularly pleased to mention that over the last three months of 1978 the average prices of previously occupied houses dropped by 6 per cent.
The motion calls on the Government to take steps to alleviate the difficulties being experienced by house purchasers. May I say that in regard to supports to housing the Government need no prompting by the Opposition. We did more to promote the national housing programme and provided more practical aid to individual house purchasers in our first year in office than the Coalition Government did in the preceding four-and-a-half years. Rates on dwelling houses were abolished. The £1,000 new house grant and a far more generous scheme of house improvement grants were introduced. The SDA loan and income limits were greatly increased. The maximum low-rise mortgage loan was also increased and eligibility for the loans has been recently liberalised. Subsidy on private housing sites provided by local authorities was increased by 66 per cent. Contrast our commitment to encouraging housing activity with the record of the previous Government, which introduced such severe restrictions on eligibility for new house and reconstruction grants that these schemes were, in effect, being phased out, with only £4½ million being spent on grants in 1977 against a provision of £30 million this year. The SDA scheme was, as I have already remarked, also effectively being wound down. In the light of their own dismal record when in power, one must question the good faith of the Deputies opposite in now calling for special aids for house purchasers. May I say, however, that if the Government were satisfied that the present position justified special measures, then the necessary action would be taken. Our track record over the past year-and-a half can leave no doubt that we would take action if we felt it was needed.
The measures we have put in hands to curb the escalation of house prices, the unprecedented amount of money now available to finance mortgages and the temporary controls on the amounts of individual loans advanced by building societies make it easier to purchase a modestly priced house. Last year a total of £280 million in mortgages were approved by all the major lending agencies. This was over £60 million more than the total amount approved in 1977.
Our record can be put beside the record of the National Coalition. We achieved more in one year than they achieved in four-and-a-half years when the grants system was being wound down because of the restrictions imposed by them and when the SDA loans were practically phased out. We can at last lay claim to the fact that our policies and the action we took got the housing programme moving again. People can now look forward to owning their own houses.
