BUILDING AND LAND SOCIETIES.

Poverty Bay Standard, Volume I, Issue 49, 3 May 1873, Page 3

BUILDING AND LAND SOCIETIES.

(From the Wanganui Chronicle.) These Societies are mostly founded for the same object, but are carried out with various modifications. They are now divided into two distinct classes ; the one Terminating and the other Permanent. A Terminating Society is one which closes at a certain period, when all the sliares subscribed for have attained by calls ami profits a certain fixed value. In a Permanent Society it is merely the membership which terminates when a member withdraws, the Society itself continuing. Whichever sutem be adopted, the object is the same; namely, to enable individuals to unite their subscriptions from time to time in one common fund ; some with the view of borrowing money with which they may purchase houses or land; others for the simple purpose of placing a portion of their incomes in an advantageous investment. And •it is quite essential that both of these classes should be represented ; for, if every member joined a Society with the intention of borrowing onlv, that Society would be a failure; unless, at starting, it could be arranged which of the members should realize each year; and that would be an impossibility. There must be members also willing to lend, and to induce a person of moderate means to lay by periodically a portion of his income, merely as an inVcstingmember, some strong inducement must be held out; and the only one that has been found successful, is to offer him a high rate of interest for the use of his money. But in the early days of these Societies this could not be done, as the usry laws forbade a higher rate of interest than 5 per cent, being charged ; and therefore nothing in the form of premiums could be deducted. It was on account of the Imperial Legislature being aware of the force of this consideration, and of the importance of removing any obstacles to the working of these Societies that the Act of 1836 was passed, which allowed any Society to charge its borrowing members, under the form of bonus, any rate of interest it might deem advisable. This clause is, however, by the repeal of the laws relating to usry now unnecessary. Expcrieuee has since shown that without this bonus (which, in many cases, takes the form of bidding by auction) the profits are quite sufficient to induce even capitalists to invest large sums. On this point Frank Detheridge says : “ Experience has proved that the practice of bidding for priority of advances, adopted in the early formed Building Societies, is useful only to those whose security is of a highly speculative'character, and who undertake to pay an enormous interest and bonus, the result proving so often the truth of the principle that the prospect of high interest is delusive, and merely another nam* for bad security. The peculiar objections to a Terminating Society are, Ist. That in consequence of its being intended to close it in a certain number of years ; or when a certain sum has been realized for shares, the opportunity for investment soon ceases, as the members are unwilling to borrow in the latter years of its existence, when the period over which a loan can extend has become so small: and 2nd. That as in all Societies there must be a number of members who only join as investors, who generally hold the majority of shares, the borrowing element is exhausted long before the termination of the Society. The" Permanent class of Societies may be explained as follows : — The members are divided into two classes, Investors and Borrowers. The investors either pay a certain monthly subscription during a fixed number of years calculated as sufficient for the realization of the shares, at the end of which time the amount due to them is paid, and they secede “from the Association as far as such shares are concerned; or they pay such sums monthly, or at more distant times as may suit their convenience. In the former cases, as also in the terminating class, members must be fined if they do not pay their subscriptions regularly, because as the profits are divided equally to each share, it would be obviously unfair to allow a member, who is in arrear, the same profit as ono who had paid up the fines are calculated at such a rate as shall not only coVer the loss of interest sustained by the non-receipt of the subscriptions, but shall also add something to the fund of general expenses ; but in the latter class no fines are necessary, as the profits are not divided by shares, but by per centage upon the amount of cash to members’ credit. The mode of advancing money is essentially different in the two classes. In the Terminating a borrower must either be a member holding shares upon which all subscriptions had been paid up to the time of requiring the advance; or he must purchase shares not only paying all past subscription, but, if the Societv stands well in the market, all past profits. He then continues to pay the subscriptions with a fixed interest on his advance till the shares have arrived at their full value. In the Permanent he needs no previous membership. He pays entrances on the number of shares he wants to borrow on; determines the number af years over which he wishes the loan to extend, and pays a certain monthly sum for those years and no longer, whatever may be the fate of the Society; but as on obtaining his advance he receives the full amount of his shares, less only a trifling commission to cover expenses, and can under no circumstances be made answerable for any losses, he does not participate in the profits of the Society to the same extent as the investors. The View taken by the ’ late distinguished J. B. Say in his Catcchisme de L’Economie Politique ” on this point is as follows: —“ Only a part of the sum paid can be considered as the payment received from the borrower by way of rent for the hiring of the money. The remainder is to cover the extra risk existing in the investment, or in the form of Premium of Assurance; at which the lender acting as his own assurer can incur the risk of loss to which he is exposed making his advance on a security which is not first class.” That the risk is considerable is proved by the

balance sheet of most Societies, but one case will be sufficient to quote : “ A society in the first ten years of its existence deqjared a profit amounting to £17,885. In the tenth altlongh £1922 of this profit, which was supposed to have been realised, fell in, by forfeiture of bonus on withdrawal, yet the aggregate, balance in favor of the society was only £47, showing a loss in that year of £1,875.” It is on this account that no society should be without a reserve fund. A Building Society without a reserve fund may be compared to a man living up to- his income, and putting nothing aside for the future. No society can be considered on a firm footing, unless a portion of its profits is periodically reserved for contingencies ; the law of probabilities being that at some time or other, a loss will have to be met even by the best regulated Society. This remark is more particularly applicable to the Permanent class ; but should also have weight with promoters of the other; for if the whole of the assurance profits are divided annually, a person withdrawing with profits would leave his share of any loss which might occur on the then existing mortgages to be met by the remainder of the members, whilst a person purchasing shares might become liable for losses on property on which he had received no benefit whatever.