A warning from history

Do you recall the Abbey Habit? If you were born before 1990 you may remember a time when our High Streets were littered with building society branches. A century ago there were over 2,000 building societies. Only 45 remain and, apart from the Nationwide, most are small regional outfits. Does the disappearance of building societies hold any lessons for the affordable housing sector? I believe so.

The first building societies appeared in the late eighteenth century and tended to be “terminating” bodies – their members bought land to build homes and then liquidated the society once this had been achieved. But these were slowly replaced by “permanent societies”, taking deposits and lending to homebuyers over the long term. Their core values were based on mutuality and self help, and their rules limited what they could do as corporate bodies. Each member had a single vote and there were restrictions on mergers and takeovers. They were also prudent lenders, which helped to limit house price inflation. All slightly dull perhaps, but building societies were the main providers of mortgages for most of the twentieth century and responsible for a huge increase in home ownership – from 23 percent in 1918 to 70 percent by the end of the century. They did more to change the social fabric of the UK than any other financial institutions.

But all this changed with the 1986 Building Societies Act, which allowed them to offer retail banking services and to de-mutualise if 75 percent of their members voted for it. Banks were also allowed to offer mortgages. The distinction between banks and building societies became blurred. Does this sound familiar?

Over the next decade most of the largest societies voted to de-mutualise. Borrowers and depositors opted for a fast buck (I was one of them) without any real understanding of the wider consequences of demutualisation. Boards and executives were keen to privatise because their salaries soared and it offered opportunities for mergers and takeovers – the empire builders had arrived. Does this sound familiar?

The largest societies – Bradford & Bingley, Abbey National, Halifax, Alliance & Leicester, Northern Rock and The Woolwich – all became banks. Yet not one of them now exists as a separate legal entity – all of them have been swallowed up by Santander, Lloyds, Barclays and the other big banks. This agglomeration created banking behemoths that were “too big to fail” and paved the way for the credit crisis and the hit on the taxpayer when the whole structure collapsed.

So over a twenty-year period an entire sector virtually disappeared, and the vast majority of the British public is worse off as a result. In 2006 an all party Parliamentary report concluded that the demutualised societies offered less choice, were providing more expensive products and that the main beneficiaries of de-mutualisation had been executives and non-executives. Between 1993 and 2000 the total remuneration of chief executives in demutualised societies increased by 293 percent, compared to only 65 percent in mutual societies. And on top of this, the advisers, lawyers and bankers in the City picked up over £1 billion in fees. But the reckless lending following the 1986 Act also contributed to house price inflation.

If you believe it is far-fetched to think that this could happen to the affordable housing sector, think again. According to the HCA’s global accounts our sector has assets of £71 billion and annual turnover of £14 billion. These are big figures and an attractive meal ticket for the money men in the City. Our sector is being increasingly squeezed by reduced levels of grant and an increasing reliance upon private finance and market products. Not only will the City exert a growing influence but, it seems to me increasingly likely that some Boards and Executives, ever anxious to expand their empires, will be tempted to morph into private sector companies.

The recent heated debate about “that” Bromford open letter has highlighted a division within the sector between “traditionalists” and those who increasingly seek to ape the memes and mantras of the private sector. For the latter group, “old fashioned” social housing seems to be trailing somewhere in the background but, like Building Societies discarding mutuality, prudence and stability, if we discard social housing what are we for exactly? What then sets us apart form other private sector providers, who in most cases can do the private sector stuff much more efficiently and ruthlessly than we can?

So if I had a message for those who want to go down the private sector route it would be this. Don’t be seduced by the whizz and bang of the private sector. Stick to your core principles of social housing and a social purpose. Your equivalents in the building society movement forged ahead with the same degree of optmism and bravado as you, but they were defenceless against the big beasts of finance and they ended up leading their organisations over a cliff, albeit with a fat pension in their back pockets.

The example of the Nationwide should be an example to us all. They stuck to their principles, refused to demutualise and have just posted record profits. Being “dull” has its merits.

Note: With thanks to Tom Murtha who prompted the original idea for this blog.

(First published at Inside Housing 26th November 2013)

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