Building Lease See
Building Lease. See Leasehold.
Building Society, an institution that makes mortgage loans to (mainly) house purchasers. The funds are derived from the savings of the public, who invest in deposits and in 'shares'; the latter are not transferable and are more like deposits themselves but carry a higher rate of interest because they are less liquid. Deposits may be withdrawn as cash at short notice; the societies make a compound settlement of tax due from investors and therefore pay interest free of tax. Most of the money on deposit is in small holdings, the average being under £1,000; holdings over 5,000 account for only about 21 per cent.
The building society movement is peculiar to Great Britain. It is over two hundred years old, but the fastest growth has been since the end of the Second World War. The assets of building societies are made up of balances due on mortgages (over 8o per cent), investments (about 13 per cent) and a small amount of cash and other assets.
As financial institutions, building societies are thus essentially illiquid: most of the assets are long term and the liabilities nominally short term, that is, individual investors can withdraw them with little notice. But in practice the deposits and 'shares' are looked upon by holders as long-term savings. Also, although the assets are individually long term, they are self-liquidating as a whole since mortgages are being repaid regularly. Assets are therefore more liquid than they may appear. Flows of funds into and out of building societies are fairly regular.
Rates of interest paid to depositors and by mortgage holders do not necessarily follow movements in other interest rates in the short run, but in the long run they must tend to approximate fairly closely to trends of long-term rates if investments are to he attracted but not in larger amounts than can be lent profitably. Short-term adjustment between inflow and outflow of funds is often achieved by an unofficial but effective rationing of advances according to type of property, amount of advance and income of borrower. Rationing may continue over long periods of time if funds fall behind the demand for then, and if interest rates are not raised to restore equilibrium.
The conduct of building societies is controlled by Building Societies Acts and supervised by the Registrar of Friendly Societies to protect the public against fraudulent management. In 2000 controls were further tightened. Some economists believe the societies need more freedom to enable then to act commercially in a competitive market for savings.
In the early '960's there were 750 building societies in Britain, but the smaller were tending to be absorbed by the larger and most of the mortgages were arranged by twenty of the largest.
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