Wednesday, 3 December 1980
Seanad Eireann Debate
Minister of State at the Department of the Environment (Mr. Connolly): This is a short Bill the primary purpose of which is to provide a general statutory basis for the payment of subsidy in respect of the interest on building society loans. The Building Societies Act, 1976, consolidated and modernised the statute law in relation to building societies but does not contain any provision enabling the payment of subsidy on loans.
The Bill also provides for the following minor changes in the existing law relating to building societies. Section 12 of the housing (Miscellaneous Provisions) Act, 1979, enables a limited form of interest subsidy to be paid to building societies on certain loans which were issued by the  societies and guaranteed by a housing authority. Section 4 of the Bill proposes to repeal section 12 of the 1979 Act, and any future subsidy payments in relation to such “guaranteed” loans will then be made under the provisions of section 2 of the Bill.
Subsection (3) of section 23 of the Building Societies Act, 1976, enables small amounts which are held in a building society in the name of a person who has died intestate to be released by the society prior to the grant of administration of the deceased person's estate. This provision has been helpful in avoiding hardship in certain cases, and section 3 of the Bill proposes to extend the provisions so as to enable a similar procedure to apply in the case of testate deaths.
As I have indicated, the primary purpose of the Bill is to provide for the payment of subsidy in respect of the interest on building society loans, and section 2 of the Bill will provide the necessary statutory basis. The section is drafted on a flexible basis and will provide a broad power to pay subsidy, leaving the details as to the type of subsidy to be prescribed in regulations.
The circumstances which gave rise to the recent subsidy and hence the present Bill were as follows. In April of this year the Irish Building Societies Association informed the Minister for the Environment that due to increases in interest rates generally and the adverse effects of their relatively unattractive interest rates on the nett inflows of funds to societies, it was necessary to recommend an increase in building society investment rates from 9 per cent to 10.75 per cent, standard rate tax paid. This would have necessitated an increase from 14.15 per cent to 16.5 per cent in the interest rate charged on home loans.
Following consideration of the report of a working group established to examine the matter, the Government decided to make available, on a temporary basis, a direct subsidy to societies for the purpose of enabling them to increase their investment rates from 1 May 1980 to 10.75 per cent without increasing the interest rate charged on house loans.
 Reductions in interest rates generally since then have enabled societies from 1 October 1980 to bring their investment rates back to the level prevailing in April of this year, and the need for the subsidy no longer exists. Liability for subsidy amounting to approximately £7 million will result though, of this amount, less than £2 million will be payable in the current year.
The reductions in interest rates recently announced by the Associated Banks together with the highly satisfactory inflows of funds to societies in recent months would, one would have expected, have left the way open to building societies to effect reductions in their investment and mortgage interest rates. Senators will be aware that the Minister for the Environment, Deputy Raphael P. Burke, recently had a number of meetings with representatives of the Irish Building Societies Association to discuss this matter and that he stressed the Government's hope that there would be an immediate and positive response from the societies. I regret that their reaction to date has been negative.
Mr. P. Reynolds: This is a short Bill. Section 1 enables the Government to pay a subsidy to the building societies for the sole reason of keeping interest rates down. From what the Minister has said and from what is conveyed in the Bill, it will also regularise the payment that is going to be made to the societies from the Government. A lot has to be done to keep interest rates down, and the interest rate is, at the moment, 14.5 per cent on moneys borrowed from the building societies. Building societies' rates vary as against local authority rates, and sometimes the difference can be very substantial.
Section 3 extends to building societies the practice that has been enjoyed by depositors with the Post Office. The next of kin of people who had a deposit in the Post Office, could withdraw that deposit without probate or letters of administration. The same practice is implied in this Bill.
There is one thing about which I am  not too clear. The registrar fixes the amount of money. How does he decide on what is a small amount? What yardstick is being used? Is one thinking of £1,000, £2,000, £10,000 or £20,000?
It is necessary for the Government to provide money at a nominal rate or at a cheap rate of interest, particularly for young married couples who are finding great difficulty in purchasing houses. I am sure that the Minister and everybody else realise that in the past few years the price of the average house has more than doubled. It has risen from £13,000 to £27,000. That is a very substantial increase in a very short space of time and the price is still going up. On 1 December wages were increased by £1, plus 8 per cent; that again is going to have a very bad effect on the price of houses.
It is pointless talking about the price of building materials, but for the record it is useful to know that inside the past week alone the price of timber has increased by 16 per cent — on one item of building material — and increases do not stop there. One often wonders about the unfortunate young people who have borrowed these substantial amounts of money. Do they think about the great demands that are coming on them? I am not a great mathematician but I am satisfied that the repayments per week in these cases would vary from about £55 to £70. That is a very substantial amount of money, even nowadays with inflation running at 20 per cent. It is no surprise that there is a big falling off in the building industry. For instance, the sales of cement, as compared with last year, have dropped by about 34 per cent. That is a very substantial drop in the sales of the raw material for building.
On top of that, in the case of many young married couples the wives have to hold on to their jobs. There is no alternative  because repayments could not possibly be met if they did not. Then the children come along and while the wife is working they are deposited with some relative, neighbour or friend. We all know that this will not make a good society. We must look at this from every angle. In bigger centres there is some type of place or house where people look after a substantial number of children who are left in in the morning and collected by parents on their way home in the evening. This is not going to help our society to be as we would want it and it breaks up the home at a very early stage. We are obliged in every way possibly to go further with subsidies to keep these prices down.
Building societies have a job to do and the Minister with us here tonight who has charge of housing has a big job on his hands. There is a great demand for houses and we all know that the building societies are not able to meet the number of applications that they have. The same problem exists with local authorities. More people will be coming to the building societies from local authorities for many reasons. One reason is that heretofore the county manager had a discretion, if somebody applied for a local authority loan or an SDA loan and had, say, £50, £60 or £100 over the income limit, to give the person that money. A county manager informed me recently that that discretion has been taken from them and it means that the prospective borrower has to go to a building society. How is he going to make his repayments on the figure that qualifies for a local authority loan, which at the moment is £5,500? How is he going to make his repayments at a rate of interest of 14.55 per cent. I do not know. The Minister is obliged to do something about it. Interest rates will have to be subsidised much further.
Dr. Whitaker: This Bill deals with only one way in which the Government with moneys provided by the Oireachtas can influence the operations of building societies. Its main purpose is to provide statutory authority for subsidising the interest rates on building society loans.
 Clearly, as recent events have shown and as the Minister of State admitted in his introductory speech, the Minister for the Environment wants to go much further than this in practice. He wants to be able to influence what the societies pay for their deposits, as this is the pivot on which their mortgage loan rates turn.
I can fully understand the Minister's concern about the societies' borrowing and lending rates, but it is quite undesirable that he should be in confrontation with them directly on such matters. It is high time that building societies were brought under the control of the Central Bank so that all interest rates and charges would be under specialised professional supervision by reference not only to the protection of depositors and borrowers but also to the broader needs of monetary and economic policy.
When the last Central Bank Act was enacted in 1971 certain financial institutions, including building societies, were specifically exempted from its scope. Building societies in 1971 were still relatively small financial institutions with aggregate resources of just about £100,000,000. They have grown so fast in the intervening decade that their resources now exceed £1,000 million. If they were excluded from Central Bank control in 1971 on a de minimis principle, no such argument is applicable now. Indeed, they have become powerful competitors of the banks for deposits and the relativity of the interest rates offered to depositors by the building societies and by the banks has a significant influence in directing how the savings of the Irish public will be used.
Interest rates are, however, not just like other charges — a matter of cost plus a profit margin. Deliberate variation upwards and downwards of interest rates has an important role to play in the contraction or easement of monetary policy and, therefore, in the management of the economy. For this reason the whole spectrum of interest rates should be supervised and influenced by the Central Bank as the monetary authority. The Central Bank has no power to fix interest rates even for banks but it has effective means  of influencing the level of bank interest rates. That influence should, in my view extend to the whole inter-connected network of interest rates, including those of the building societies. With resources now in excess of £1,000 million, it seems evident that it is the Central Bank and not any registrar or departmental officials who should be monitoring such critical questions as the prudent liquidity ratios to maintain in building societies or the balance that should be held between their short-term liabilities and their longer-term loans for various purposes.
I conclude by saying that I did not consult my former colleagues in the Central Bank before putting forward this suggestion. They may feel they have enough on their plate already. I do believe that putting building societies under the wing of the Central Bank would be much preferable to letting things continue as they are now, and I commend this suggestion to the Minister.
Mr. O'Brien: We have just heard the expert, professional opinion of Senator Whitaker on this complex matter of finance and how it can be handled. I propose to look at it briefly from another point of view. As the layman sees it at present, the rate of interest that the building societies can give the investors will determine whether they will get an inflow of investment. If they fall below what is being offered by other societies they will go out of existence. In a case like that, until the suggestion offered by Senator Whitaker is implemented the Government must step in with a subsidy.
I would like to approach this from the other point of view which was developed to some degree by Senator Reynolds, that is the tremendous burden that young married couples are taking on with house mortgages. There was an old dictum that if the housing of a family cost more than one-eighth of the income it was extravagant. The present trend is that housing is costing as high as one-fifth and in some cases a quarter of the income and that is a tremendous burden on young married couples. If we couple with that the hire of furniture, kitchen utensils and other amenities, we see that people who are  not more that usually wise accumulate a crushing burden of debts or overheads. that is contributing largely to marriage breakdowns. Furthermore, it contributes to unreasonable demands from unions because many members of these unions have built up a huge pile of debts and they are forced, in order to survive, to compel the union negotiators to look for increases that they in their hearts know their own company and the country as a whole cannot afford. This is snowballing and it has a very serious effect on social and economic life.
Senator Whitaker has suggested how it could be controlled from the top. I would not be capable of going into that but I think that something could be done about encouraging more saving. Young people nowadays as soon as they start earning set out on a real spending spree. They live up to a very high standard. They spend a lot of money on luxuries. They buy cars on the HP system. They have costly weekends. The thought of providing for their future enters into very few minds. Then when they marry and settle down they find themselves embarked on a completely new kind of life. They have not learned the habit of saving. They have not learned to make provision for this new life, and suddenly they find out that they have very heavy commitments that they are not prepared for. That leads to domestic unhappiness. As Senator Reynolds points out, this forces more and more married women, mothers of young families, to hold on to their jobs in order that their earnings together with their husbands' might enable them to meet the overheads they have incurred.
There may be different views on this, but I am inclined to the view that it would be better for the rising generation if more mothers could devote time to bringing up the children in their homes. Also more and more young people are unable to find work when married women hold on to the jobs. Inducement to people to save and further benefits for people who came to apply for a loan would have a very desirable effect and would make people more conscious of the need to save to prepare for the next stage in life. This  extravagant expenditure would be curbed and people would be free of these crushing burdens of mortgages and hire purchase payments.
Ruairí Brugha: I have no doubt that the building societies are performing a very useful function in providing the funds for the building of houses by individuals. Because of that it is obvious that this measure should be supported. However. I would like the Minister when he is replying to give some idea of the value of the taxpayers' £7 million—I presume next year rather than this year— that will contribute to the subsidisation and the lowering of the level of interest so as to provide the houses that are necessary. Naturally, if the taxpayer is providing this money it would be useful for people to have some idea of what the contribution in numbers of houses has been or will be.
I have also no doubt that the highest social and financial priority should be devoted to this question of encouraging and helping young people to provide their own homes rather than have them relying on the local authorities to do so. We all know that there is a large queue, a waiting list, in most areas for local authority houses. We also know that the cost factor is now in or around the £30,000 mark or thereabouts in many cases for local authorities and therefore, every additional house that can be provided by young persons through the medium of mortgages from building societies reduces the cost to the local authority and, therefore, to the Exchequer. As well as that, it reduces the number potentially on the waiting list. The highest priority should be given not alone to this entire question of subsidisation of interest rates on mortgages but also to the matter—which I have not heard put forward before and which was just mentioned by Senator Whitaker—of interest rates and the useful function which can be performed by building societies in addition to the banking system in the social structure of providing houses. Our lives in this country, in the neighbouring island and, more recently, in the United States are bedevilled by the high levels of interest. This is a major problem, but  there is merit in what Senator Whitaker has suggested. I believe that that aspect ought also to be examined to see if a greater measure of expansion in the building of houses by individuals can be effected.
Minister of State at the Department of the Environment (Mr. Connolly): Senator Reynolds referred to the current high interest rates payable on mortages and I share his concern at the burden this places on house purchasers. I have every hope, however, that in the coming week the building societies association will decide to follow the lead of the associated banks, the Industrial Credit Company and the Agricultural Credit Corporation and reduce their present interest rates.
Senator Reynolds also referred to section 12 of the Housing Act, 1979. It enables the payment of a particular type of subsidy on certain loans which were guaranteed by the housing authorities. The new Bill, in section 2, has financial powers to pay a subsidy. Section 12, therefore, will be no longer necessary and is being repealed.
Senator Reynolds also referred to the inability of societies to meet the demand on them for loans. Societies have had an unprecedented inflow of investment funds. My Department estimated that the societies would advance a total of £250 million in loans this year, as compared with £200 million last year. The present indications are that the societies will have a total of £325 million available for loans in 1980. Senator Reynolds was correct in stating that the registrar of building societies decides from time to time what maximum amount of the investment standing to the credit of a deceased investor can be paid out to the next of kin in advance of probate or administration. The ceiling at present is £3,000 but it is open to the registrar at his discretion, to increase the limit.
I have taken note of Senator Whitaker's views as to the control of interest rates. Whether or not to provide power to control building societies' interest was considered in connection with the Building  Societies Bill, 1976, and it was specifically decided by both Houses of the Oireachtas at that stage that such control was not advisable. Experience since has largely justified that decision.
Senator O'Brien referred to the difficulties experienced by young couples who run up debts on the HP system and cannot meet repayments on top of their mortgage bill. The societies are anxious to inculcate a habit of saving on the part of intending borrowers and, for this purpose, most of the societies have a requirement that loans will be given only to persons who have been regular investors with them over a period of at least a year and, in some cases, it may be more.
Senator Brugha asked about the cost of housing, which is a great problem and a worry to me because the unit cost here in the inner city is £40,000 a house approximately. I want to be clear on this. Here in the inner city of Dublin it is costing approximately £40,000 a house.
Mr. Connolly: Local authority and NBA houses. In my own constituency houses are being erected for under £20,000 and the average throughout the country is £20,000 approximately. One can see the great disparity in the inner city and in the country. In the country I can build two houses for the same amount of money as it would cost to build one house in the inner city.
Mr. Connolly: No. I have excluded the inner city. I am talking about the rest of the country. I am as anxious as anybody is to see that private housing development should go ahead. We are still prepared to erect sufficient local authority houses to meet the needs of the people who are unable to provide their own homes. Since I came into office, I increased the income limits and the amount of the loan. It has been highly attractive and there has been an unprecedented inflow of applications.
I wish to thank all who contributed to the discussion on the Bill, which is a short one. It is important in its enabling provisions. As it is such a short, non-contentious Bill, I would be glad if Senators would give me all the stages today. I think that could be possible. This will enable me to pay out the subsidies due to the societies which must be deferred until the Bill is enacted. You can understand why I am anxious.
Mr. Connolly: We do not have that information, but for the first nine months, approximately 18,000 were privately built, which is a record. I am very anxious that the private development shall go ahead and, above all, I want to make it clear, because there are a number of Senators here from rural areas, that I am anxious that villages throughout the country are also catered for.
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