SECTION V

SOME FACTORS RELATING TO THE INCREASED COST OF HOUSING

Houses are built to live in, and not to look on; therefore let use be preferred before uniformity, except where both may be had.”—BACON's ESSAY Of Building.

CHAPTER XVIII

FINANCIAL

WHEN money is dear speculative building is checked in two ways. In the first place builders are usually men with small capital, who find few people willing to finance

(a) Dear Money. their operations. Even before the war they had to pay on borrowed money from to 1 per cent. more than they did a few years ago, and some admit that it is to-day almost impossible to borrow money, even at a higher rate. In the second place many of those who buy houses as an investment secure a mortgage to cover two-thirds of the value. If the interest on that mortgage is high they must obtain a high rent in order to be able to pay it, but the process of forcing rents up, except under abnormal conditions, is very slow and difficult.

How vitally important a factor this is will be realized at once if we remember that on a house costing £250, 1 per cent. addition to the rate of interest means the addition of 1s. a week to the rent. Or, to give another illustration, on houses costing £250 each, and built twenty to the acre, an addition of 1 per cent. to the rate of interest means an additional yearly payment of £50 per acre, which is equivalent to an addition of £1,000 an acre to the cost of the land, assuming the rate of interest to be 5 per cent.

The attraction of capital to investments other than houses has been gradually increasing. In the early days of industrial development in this country the railway system was in (b) Increased Attractiveness its infancy. Private enterprise was responsible of Alternative for our manufactures, and the manufacturer, if Investments. he wished to extend his works, found it necessary to house his work-people, and to expend capital for this purpose.

With the increase in industrial prosperity other persons had money to invest, but, apart from Government securities bearing a comparatively low rate of interest, the investment market afforded little choice. The conditions were such that capital was almost entirely employed in the districts where it was created, and it is, therefore, not surprising that house property, providing as it did a tangible and visible security, was largely favoured.

With the great development of the railway system commenced the movement of capital to other centres, and its investment in the railways themselves. In 1862 the Joint Stock (Limited Liability) Act was passed, resulting in an immense addition to the openings for capital. In 1914 there were trading in the United Kingdom 64,692 registered joint stock companies with a paid-up capital of 2,532 millions sterling. In addition there were 2,497 industrial and provident societies with 45 millions of capital. Opportunity for investment in foreign securities also increased enormously, and in the years 1908-9-10 the total British capital subscribed for new issues in London in respect of foreign and colonial securities amounted to 516 millions.

But, until recently, in spite of this great increase in the outlets for money, many persons, especially the smaller capitalists, looked with suspicion on joint stock companies and foreign securities, and money was always available for investment in the purchase of, or mortgage upon, house property. Of late, however, the increase in the cost of building, the difficulty of raising rents, and doubtless some loss of confidence, have had their effect. Even before the war the small capitalist was beginning to learn that a safe and remunerative return might be obtained in other directions, free from many of the liabilities and risks which attend investment in houses, and the campaigns which during recent years have been organized to educate the public to the advantage of investment in the national securities are likely still further to accentuate this tendency.

Another factor which has an even greater influence upon the small investor than an increase in the return obtainable on foreign, and even British, securities with which he is not familiar, is the great increase in facilities for the investment of small sums near home. The enormous growth of the co-operative movement, and the increase, especially in the textile towns, in the number of small

joint stock undertakings in which the workers themselves are often the principal shareholders, must have absorbed during recent years a considerable portion of the working-class savings which previously would have gone into house property. This constitutes a factor which is likely to be permanent in character.

Capital is in great demand, both at home and in industrially growing countries like South America and Canada, and high rates of interest are offered.

The result of these demands for capital has been that gilt-edged securities have become much cheaper, and can now be bought at very tempting prices.

The table on page 162 (which has been confirmed by Messrs. Sing, White & Co., Stock and Share Brokers, of Liverpool) shows how continuous has been the drop in prices of a few typical giltedged securities during the last twenty years. Obviously, if 4 per cent. can be obtained by investing in those securities, which can be realized at any moment, investors will not be inclined to lend money on mortgage unless it brings in more. The rise since 1914 is due to abnormal causes consequent upon the war.

Capital has thus been too scarce and dear for the housing problem to be tackled on a large scale. With capital plentiful and cheap and the energy of the people put into the work the output might be greatly multiplied.

This difficulty everyone can help to overcome by spending less on luxuries, and living a more sensible life, in accordance with a more general standard of comfort, based on real wants.

It will generally be recognized that a number of causes have combined to exercise a depressing influence on the trade of supplying house accommodation for the working classes. As a rule, the capital of the speculative builder being small, his business is dependent on ready facilities for borrowing in order to provide the means for carrying on his operations. Before entering upon a building scheme he invariably arranges for advances of capital to be made during the progress of the work, without which he is unable to proceed. Any substantial increase in the interest payable on these advances, or other factors materially affecting the cost of building, must seriously influence his operations, for he does not build as an investment, but to sell; and anything affecting the cost will necessarily react upon the market for his houses. As

11-(1752)

his margin of capital is small, he is dependent upon a ready sale for the continuance of his operations.

It has been shown that the supply of houses is dependent, inter alia, upon the rate of interest and insurance on all the capital involved. Thus the builder when considering his possible margin of profit must consider the rate of interest in relation to the cost.

(c) Rate of
Interest.

For a considerable period previous to the war there was a tendency for the rate of interest to rise, as has been already indicated. The mean interest on large issues is thus quoted by Lehfeldt 1_

The following are the Bank Rate changes since the above figures

were published

1912-8th Feb.-31%; 9th May-3%; 29th Aug.-4%; 17th Oct.-5%. 1913-17th April-41%; 2nd Oct.-5%.

1914.-8th Jan.-41%; 22nd Jan.-4%; 29th Jan.-3%; 30th July-4%; 31st July-8%; 1st Aug.-10%; 6th Aug.-6%; 8th Aug.-5%. 1915. No alteration.

1916.-13th July-6%.

1917.-18th Jan.-54%; 5th Apl.-5%.

1918.

No alteration.

1919. 6th Nov.-6%.

"The Rate of Interest on British and Foreign Investments." Vol. lxxvi, Journal of the Royal Statistical Society, 1913, p. 205.