Council House Sales – the Financial Dilemma
By Eamon Dyas
It is generally accepted that the 1980 Housing Act represented the greatest shift in public housing policy since the Second World War. Michael Heseltine, the environment minister in the Conservative Government at the time, described it as a social revolution. In the sense that it represented the most significant re-distribution of the nation’s wealth in history the term social revolution might not be too wide of the mark. But genuine social revolutions are bottom-up affairs and Heseltine’s social revolution was very much a top-down one. Because of this it required a strong political will on the part of government to implement. It also required the determination to ensure that the required financial resources necessary to make it work were available.
The political aspects of this social revolution were covered in the previous issue of Labour Affairs. What I propose to do in this issue is to explore the financial requirements associated with the Conservative Party’s Right to Buy social revolution.
As a purely financial transaction, in order for it to succeed the Right to Buy (RTB) policy needed both a purchaser with the capacity to buy and a seller willing to sell (in this case at a significant loss).
From the point of view of prospective purchasers, even before the advent of the RTB policy, tenants had the right to buy, but that right was only possible with the permission of the local council. As a result, many tenants provided with the opportunity to do so, purchased their council homes. In such instances however, they did so without any significant financial help or inducement. It was well within the earning capacity of a skilled worker to procure a council house when it became available. It was also within the capacity of those council households where there was more than one wage-earner. Unsurprisingly then, in the period between 1960 and 1978 (the year before the Tories came to power), 211,289 council dwellings and 34,887 New Town dwellings were sold to their tenants even at the relatively low levels of discounts then available (usually up to 20% of the market value).
The arrival of the Tory Government in 1979 changed the dynamics of the existing relationship between the prospective buyer (the tenant) and the seller (the local housing authority). As a result of the subsequent RTB legislation the local housing authority no longer had a say over what it sold or when it sold its stock of accommodation. From the point when the Tory RTB policy became law in 1980 the local council was compelled to sell irrespective of its own policy in the matter. However, the mere devolving of that right to the council tenant did not automatically mean that all those newly-empowered council tenants would take advantage of that right. The 1980 Housing Act could not compel the tenant to purchase his or her council property and if the legislation was to be the tool by which Thatcher’s Britain was to become a “property-owning democracy” the State had to intervene in the previously established relationship between the purchaser and seller in a way that provided a meaningful encouragement to the buyer – in other words, an artificial stimulation of the demand side of the purchaser/seller equation.
This took the form of inducement and those inducements took the form of discounts which initially increased in 1979 from 20% to a minimum 33% and a maximum of 50% of the market value of the council property depending on the number of years the tenant had been an occupier. However, in order to ensure a continuing high take-up the Government was compelled to further raise the maximum discount to 60% in 1984 and to a “you’d have to be mad not to” 70% in 1986.
While these inducements could be said to have acted as an influence on the demand for council house sales that demand still had to assume the character of “an effective monetary demand” if there was to be a consummation of the buyer/seller relationship resulting in an actual sale. Without that consummation the housing stock would remain under public ownership and represent a disaster for the RTB policy. The problem for the Tory Government was that it needed to ensure that a significant component of the working class had access to the funding it required to purchase their council homes for it to be able to claim that its RTB policy was a success.
One element of working-class life which helped to translate the RTB into a monetarily effective demand was indirectly provided as a by-product of another aspect of the Tory economic policies at this time. Those policies were essentially hostile to industry and had the effect of driving a lot of border-line manufacturing factories to the wall. As an increasing number of such companies failed during the 1980s it created a new pool of working class council tenants who now found that their redundancy packages provided them with a means of purchasing their homes. The author, Chris McCrudden, provides a personal account of the way in which his father’s redundancy package was used to purchase their council house in the Whiteleas area of South Shields in his essay “Shy Bairns Get Nowt” (Common People: an anthology of working-class writers, published by Unbound, 2019)(Photo).
Yet, while the growth in redundancy packages might have provided the means by which a certain number of council tenants could buy their council properties the success of the RTB policy required funding to be available on a much larger scale to a much larger number of council tenants. It is here that access to mortgage funding became critical.
Industry and council house purchase – a common problem of investment
But where was such funding to come from? Faced with a constituency of council home tenants who might wish to buy their homes, the institutions that traditionally allocated mortgages remained cautious even in the face of generous discounts. At the same time within that constituency there existed a strong culture which eschewed the idea of debt (although this was changing by the late 1970s to early 1980s it still remained a significant component of working class culture).
While not being able to do much about the culture of credit avoidance among significant sections of the working class, the Tory Government concentrated on the problem of access to funding. In addressing Parliament on the occasion of the Queen’s Speech in 1979 Thatcher promised that tenants wishing to buy their council house would be provided with a 100% mortgage if required.
But the question remained as to who was to supply these 100% mortgages to council tenants even with up to 60% discounts. The mortgage market at this time was dominated by the building societies which traditionally had operated to a very cautious lending culture. If they were to fill the demand that culture would need to be changed while at the same time encouraging the banks, traditionally a very small operator in the mortgage market, to take on a bigger role. In the latter case the Tory Government was pushing at an open door.
Shortly after the Thatcher Government came to power in 1979 Robin Leigh-Pemberton, then chairman of the National Westminster Bank and later, between 1983 and 1993, Governor of the Bank of England, raised the issue of the advantages of the Building Societies when it came to personal savings. This was something that the banks had been complaining about for some years and had raised at the hearings of the Wilson Committee which sat between January 1977 and 1981. The Wilson Committee had been established in 1977 to address what was seen by the Labour Government as the problem of lack of investment in industry and its brief was to provide both explanations and possible remedies. The purpose of the Committee was:
“To enquire into the role and functioning, at home and abroad, of financial institutions in the United Kingdom and their value to the economy; to review in particular the provision of funds for industry and trade; to consider what changes are required in the existing arrangements for the supervision of these institutions, including the possible extension of the public sector, and to make recommendations.”
Much of what the Committee dealt with came to be of little relevance by the time it published its report in 1981 as by then the priorities of the Thatcher Government were very different particularly when it came to manufacturing industry. Nonetheless, the report did contain some conclusions which the new government could use in its formulation of its carte blanche policies towards the financial sector.
One issue the Committee’s report considered was the disparity in the tax arrangements between the building societies and the banks which Leigh-Pemberton had raised in 1979 shortly after Thatcher was elected.
Investors in a building society account received preferential treatment when it came to the tax arrangements compared to those with a normal bank deposit account. This resulted in a benefit to the building Society account holder. That benefit varied with the fluctuating Bank of England interest rate but using the middle of the 1970s as an example a building society account holder at that time could expect a payment of 7% after tax paid. For the basic rate tax payer this was the equivalent of 10.77% gross. Comparing this with the next best rate which was available through a Trustee Savings Bank (which paid up to 9.5% gross) or that a personal deposit account with a high street bank which only brought in 6.25% gross (see: Sunday Times, 29 June 1975, p.49) and the extent of the disparity becomes obvious.
It was this disparity in the gross interest offered by the building societies and the high street banks that underpinned the attraction of the former over the latter when it came to the investment choices of the ordinary saver.
The justification for this inequitable arrangement was always that the building societies, as the traditional providers of housing mortgages, needed to ensure that their financial coffers were sufficient to sustain the ongoing demand for mortgage loans. Should their capacity to provide such mortgage loans prove inadequate to the existing housing demand the market would be starved of funds and in turn grind to a halt with all the implications that had for the wider employment situation in the building industry and beyond. In addition, the accelerating cultural trend towards more home ownership since end of the 1950s meant that any frustrating of that trend would also have political implications.
By the time that Margaret Thatcher came to power in 1979 the situation created by the almost monopoly status of the building societies in the mortgage markets had become a factor that could not be ignored in her RTB plans for council homes.
That monopoly was sustained by their growing position as the location of choice for domestic sterling depositors. At that point the percentage share of the Building Societies in the domestic sterling deposit market had more than doubled from 18.4% in 1964 to 37.8% in 1978 while the equivalent figures for the high street banks showed a reduction from 36.8% in 1964 to 30.5% in 1978. With the prospect of that trajectory continuing the Wilson Committee recommended the removal of the tax advantage then enjoyed by the building societies. According to the Committee’s argument the growing tendency of the current arrangements funneled potential investor money from the wider arena in which banks could lend to the narrow and restricted areas of property where building societies operated. Given that the Committee had been set up in 1977 to identify the reasons for what was seen as a lack of investment in industry and that it had refused to endorse a greater role for the State as a possible solution (through the nationalisation of financial institutions) what the Committee was left with was the re-jigging of the existing areas of domestic financial accumulation in ways that could facilitate a greater flow of investment to the required target.
However, what the Wilson Committee did not foresee was that the target for such investment flows, after the fall of the Labour Government in 1979, was no longer industry but rather housing, and via housing, the financial sector itself.
Building societies and banks
With the introduction of the RTB there arose, over a relatively short period of time, the prospect of hundreds of thousands of council tenants requiring access to mortgages. While the building societies were quite capable of continuing to function along lines, and at an intensity which reflected a slow acceleration in the housing market, they were not geared up to meet the level and type of demand implicit in Thatcher’s RTB policy. The traditional culture of caution that prevailed in the building societies made them unsuitable for the risk-taking element that came with the need to provide council house tenants on such a massive scale, with the funds necessary to purchase their council home.
The solution was for other financial institutions to become players in the house mortgage market and the obvious candidate for this was the banks. Up to now the only area where the banks performed such a role was on the high-end of the property market and they had little experience or capacity to broaden out their operations to supply the mass market in mortgages. Nonetheless, the banks had seen the way in which the market for home ownership had been moving from the 1960s and had begun to make some moves in that direction. But such moves were painfully slow and those banks willing to dip their toes into the uncertain waters of council property mortgages had to contend with the wariness of their institutional depositors and shareholders. The paradox was that while the banks with their large and institutional depositors had the potential to increase the size of the financial well from which more mortgages could be drawn the nature of the mortgages ensured that banks could only move as far and as fast in that direction as their circumstances permitted.
Consequently, if they were to play a significant role in the mass provision of mortgages they, like the building societies, needed to ensure that their access to more depositors could provide the funding to meet any significant increase in their mortgage lending activities. In other words, they needed to attract increasing numbers of depositors to meet any anticipated increase in the levels of mortgage loans. But their attempts to facilitate this came up against the the fact that they did not possess the tax advantages that the building societies could offer their depositors.
The results of this disparity between the banks and the building societies was thus a problem for a Government intent on selling off the biggest and most significant of State assets – its public housing stock. It wasn’t politically acceptable, or indeed, under the circumstances economically possible, to overcome the problem by simply abolishing the tax benefits enjoyed by the building societies at a stroke. Nor was it possible to provide the banks with a similar tax advantage as the Building Societies – something that would, in all likelihood have made no, or little difference to depositors’ habits which traditionally viewed the building societies as the natural home for such deposits. What would have made a difference was a possible re-calibrating of the relative tax advantages between the banks and the building societies by enabling the banks to offer a higher level of tax relief. But, even if it were politically possible, such a crude device would have had the effect of moving depositor money too quickly from institutions that had the relevant expertise and relationship with the housing sector to those which did not.
And yet, if Thatcher’s RTB policy was to succeed it required some means by which the necessary funds were made available to the hundreds of thousands of potential council buyers. How this was done and the implications it had for wider economy will be explored in a future issue of Labour Affairs.