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30 years… and counting By Adrian Coles, Director-General, The Building Societies Association


I write these notes with around three months remaining of my 30 year plus career at The Building Societies Association. Indeed, I joined the Association on 1 December 1979 – the day the BSA’s recommended mortgage rate rose from 11.75 per cent to 15 per cent in one go – and will be leaving on 30 November 2013, giving me an exact 34 years in the Association. I became Director-General in July 1993, thus completing 20 years service in this position during the summer of 2013. These notes reflect some of the key developments of this period. In fact, in the interests of containing them to the length of an article rather than a book, I have picked what I consider to be the foremost episodes across the three decades.


The end of the recommended rate system and the beginning of price competition


I joined the BSA as an Economist and initially had responsibility for writing papers for the BSA Council that would enable them to make decisions on the rate of interest which it recommended building societies pay on various types of savings account, and charge on mortgages. In 1979 building societies accounted for over 90 per cent of all mortgage lending as the banks were not yet in this market. The recommended rate system had been specifically exempted from the Restrictive Trade Practices Act of 1977; most building societies followed the recommendations irrespective of their own profit and loss and balance sheet considerations.


Remarkably, the agreement to follow a consistent pricing policy was also accompanied by what was known as the Interest Rates Undertaking. Each society had signed this agreement, under which they gave the BSA at least 28 days’ notice of any intention they might have to become more competitive – that is to increase savings rates or to reduce mortgage rates. It was highly likely that within the 28 days there would be another meeting of the BSA Council – which in those times met 11 times a year (people were on holiday in August) and was 35 persons strong. Accordingly, individual institutions proposing anything as rash as deciding their own pricing could be persuaded otherwise.


The lack of competition on price meant that societies competed with each other in other ways – basically, service provision and, more specifically, branch provision. In 1970 the pre-demutalisation building society sector had 2,000 branches; by 1980 (still pre-demutalisation) the total had risen to 6,000 – an increase of 4,000 or 400 a year or eight a week. This trend was as widely criticised by the end of the 1970s for damaging British high streets, as the trend across all financial services providers towards branch closure is now. It is notable that branch openings slowed considerably then came to a stop as soon as price competition came into the market.


Such competition arose as a result of the entry of the banks into the mortgage market encouraged by the Thatcher government. In 1980 banks accounted for 5 per cent of net mortgage lending. By 1982 this figure had risen to 35 per cent. The BSA’s tendency – sometimes under political pressure – to keep the mortgage rate below a market clearing level created a natural queue for mortgages, a feeling that building society service levels weren’t that high and an appetite, on the part of customers, for new bank lending.


Sponsored by 10


It soon became clear that banks were not going to play the interest rate guidance game, particularly as it came from the Building Societies Association – a trade association of which they were not members. By 1983 the recommended rate system had collapsed, as individual societies wished to reflect the differing market conditions they faced in their own way. It was replaced by a system of suggested rates. This was a very much weaker arrangement and the whole idea of any trade association guidance on interest rates gradually fell away by 1986.


Boom at the end of the 80s – Crash at the start of the 90s


The late 1980s saw the zenith of a boom in mortgage lending – partly created by the deregulation of the mortgage market of which the abolition of the recommended rates system was an important component. House price inflation climbed rapidly to over 30 per cent a year – higher in some regions and lending for house purchase increased almost as rapidly. At the same time lenders began experimenting with new techniques of securitisation and centralised mortgage lending, as it was then known, and business confidence was boosted by the reduction in the upper rate of income tax from 60 per cent to 40 per cent in the 1988 budget. In that same budget, bubble conditions were further inflated by an early announcement of a reduction in the level of mortgage interest tax relief which were to take effect four months later – adequate time to rush into a mortgage that qualified for the life of the loan under the old, more generous, system.


However, by late 1988 general price inflation began to increase as did the balance of payments deficit. Between mid 1988 and late 1989 typical variable mortgage rates increased from eight per cent to 15 per cent and the early 1990s were characterised by falling house prices and transactions, and rising unemployment, arrears and repossessions. A new term – “negative equity” – entered the lexicon. This referred to a situation in which borrowers found it very difficult to move house – they could not sell their homes for a sufficient amount to clear their existing mortgage. Selling a home and moving down market had, in the past, offered an escape route to those finding it difficult to service their mortgages at a time of rising interest rates.


Relief came with the forced departure of the UK from the Exchange Rate Mechanism. The removal of the requirement to hold interest rates high to defend what turned out to be an indefensible exchange rate resulted in a very sharp fall in interest rates. This was regarded as a disaster at the time (in 1992), but in fact was one of the most important factors producing the period of unprecedented economic


...continued www.bsa.org.uk


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