adopting spatially flexible lending strategies: building society mortgage lending in dublin during...

Adopting Spatially Flexible Lending Strategies: Building Society Mortgage Lending in Dublinduring the 1980sAuthor(s): Laurence MurphySource: Area, Vol. 24, No. 1 (Mar., 1992), pp. 30-35Published by: The Royal Geographical Society (with the Institute of British Geographers)Stable URL: http://www.jstor.org/stable/20003049 .

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Area (1992) 24.1, 30-35

Adopting spatially flexible lending strategies: building society mortgage lending in Dublin during the 1980s

Laurence Murphy, Department of Geography, The London School of Economics and Political Science, Houghton Street, London WC2A 2AE

Summary Responding to changing conditions in the housing and finance markets the Irish building societies have adopted spatially flexible lending strategies tailored to minimise potential mortgage losses. This paper examines the factors underlying the societies' designation of areas of surburban

Dublin as poor lending environments and assesses the implication of such practicesfor owner occupiers.

The role of institutional mortgage lending in the socio-spatial structuring of residential space has elicited considerable attention from researchers. In particular a large body of

work has focused attention on the adoption of redlining practices by lending insti tutions. A common element in this work has been the definition of redlining as a process

whereby 'building societies explicitly delineate in some way sections of cities where they will not usually grant mortgages ' (Jones and Maclennan 1987, 205). By definition redlining is often seen as part of a simple loan refusal/area lending process. Such definitions are restrictive in that they do not take account of the flexibility of building society mortgage practices. Building societies are not monolithic institutions, rather they are constantly developing organisations influenced by the evolving nature of the legislative environment in which they operate and responding to changes in the markets in which they compete. The work of Ball et al (1986, 1988) and Martens (1985) has highlighted the significant and dynamic role of mortgage institutions in the develop

ment of historically specific, and nationally constituted, structures of housing pro vision. Yet, little attention has been focused on the manner in which the dynamic of institutional change influences the spatial patterning of the societies' mortgage business. Combining information obtained from surveys with senior personnel of the building societies in Ireland, with information on changes occurring in the Dublin housing market, this paper examines the process whereby the societies have come to regard suburban housing estates as poor quality lending environments and have adopted cautious and restrictive lending practices in these areas. The identification of these poor quality lending areas provides an insight into the ways in which institutional change in mortgage finance has affected owner-occupiers in Dublin during the 1980s.

Primary data source

In order to gather information on the lending strategies of the building societies operating in Ireland in the 1980s structured interviews were undertaken with represen tatives of the eight largest societies in the country. Between them these eight societies accounted for 99 per cent the total assets of the movement (Ruane 1987). To ensure that the information obtained for each society reflected corporate policy, interviews were conducted with senior head office personnel only'. Given the positions held by the



Mortgage lending in Dublin 31

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interviewees, and the dominance of these societies within the building society move ment, the survey results provide an authoritative source from which to draw insights into the manner in which the societies' organisational structures and managing practices have developed.

Designating areas as poor quality lending environments

Whilst none of the societies admitted to operating redlining practices, seven societies indicated that there were areas in Dublin where they would exercise 'caution' in advancing new funds. Such caution went beyond the normal cautious lending practices of the societies and as such constituted a means by which the flow of funds into particular areas could be restricted. Among the five largest societies one manager stated ' to be honest we do redline to a degree ... [for] ... if we don't want to lend in an area we restrict the level of advances ' whilst representatives of three other societies stated that they would be cautious of lending money on property in areas which had poor resale values. With respect to the three smaller societies, managers argued that they did not operate spatially biased lending strategies but conceded that by virtue of their size and organisational structures (based on agencies) their lending was restricted to particular areas of the city. Yet, even among these smaller societies there was a willingness to designate sectors of the Dublin housing market as problematic. One manager stated ' We are cautious of all low income houses ' and went on to name particular areas of the

city which were deemed to be poor lending environments. Four areas were identified as constituting poor risk areas. These were: the inner city;

Tallaght; Clondalkin and Finglas (see Figure 1). All four areas are geographically large and encompass a variety of residential environments. Within any one of these areas,



32 Murphy

such as the inner city, there are certain estates and neighbourhoods which the societies would regard as good quality lending areas. Given the sensitive nature of the data, the societies were unwilling to be more specific in identifying problem areas. Yet, notwith standing the areal extent of these areas, the findings were significant in two ways. First, the identification of the inner city as a locus of' cautious' lending practices on the part of the societies was consistent with research findings from the UK and the US (Boddy 1976; Williams 1976, 1978; Bassett and Short 1980; Dingemans 1979; Kantor and

Nystuen 1982)2. Secondly, the identification of suburban areas as poor lending environ ments was highly significant. In this context the societies' practices reflected the specific character of Dublin's residential structure (Bannon et al 1981; Brady 1987).

However these practices also reflected the enforced adoption of more spatially flexible lending strategies by the societies in the light of increased competition in the mortgage

market and by the recognition that suburban areas were no longer trouble free lending environments.

Three factors relating to the development of individual estates were employed by managers in their assessment of problem suburbs. These were: the size of estates; the date of development and the socio-economic status of estates. With respect to the size of developments the societies argued that large housing estates of over 1,000 houses tended to become unpopular and were unable to maintain their second-hand value. Interestingly, in relation to the age of houses, it was argued that newer houses built after 1970 tended to lose their value quickly. Finally, it was believed that estates occupied by lower status groups were generally poor risk areas.

The identification of problem areas resulted in the societies adopting lending prac tices which were aimed at restricting the flow of funds into these areas. The societies' caution manifested itself in two ways. First, lower percentage advances were given in these areas. As a manager in one of the smaller societies put it,' . . . take Tallaght, we are not going to give an 80 per cent loan there '. Secondly, pressure was placed on surveyors to produce conservative valuations on property in these areas. In particular the societies placed pressure on valuers to discount the value of houses by an amount commensurate with cash grants available to first time buyers (see Restrictive Practices Commission 1985)3.

The building societies and the growth of Dublin's suburbs

The societies' lending policies in the 1980s represent a distinct break from previous lending practices and further reinforces the importance of the survey findings. Over the period 1926-1986 the population of Dublin doubled from 506,000 to 1,020,000. Simi larly, the built up area of the city underwent considerable expansion (see Horner 1985 and 1990) and 'almost 60 per cent of this growth took place in the twenty years from 1961 to 1981 '(Bannon 1988, 134-5). A significant proportion of the growth occurring

within the Country was channelled into the development of the New Towns of Tallaght, Clondalkin and Blanchardstown which were developed from the late 1960s (see Figure 1). Within the context of a massive extension of the contiguous built-up area of the city the rate of home ownership within the Dublin region rose from 42 per cent in 1961 to 69 per cent in 198 14. Throughout this period the building societies were the dominant source of institutional funds for home loans .

The building societies' role in funding home ownership in the suburbs was enhanced by the interaction of a number of forces. First, the societies' lending criteria favoured newly built houses over existing housing stock in the inner city (Baker and O'Brien 1979; Blackwell 1988). Such a policy was viewed by the societies as prudent manage

ment since it had the effect of making their asset portfolios more youthful. Secondly,




between 1971 and 1974 the societies concentrated their lending in the new housing market directing over 60 per cent of their mortgage payments to this segment of the market. This policy was strongly influenced by the growth of new house construction at

this time, but also by government policy. In 1973 the government introduced a subsidy to the building societies and in order for the societies to avail themselves of this subsidy they had to direct the bulk of their lending towards the middle and lower end of the

market and were initially encouraged to direct their funds into the new house market only (Baker and O'Brien 1979; Dowling 1973-74). Thirdly, from interviews with the building societies' managers it is clear that at least one of the largest societies in the country entered into a block mortgage arrangement with one of the largest house builders operating at that time. The existance of overt business links between the societies and large speculative housebuilders, who were largely responsible for building

Dublin's post 1970s suburbs, reinforces the contention that the societies played an important role in helping to fund the expansion of home ownership in suburban

Dublin.

Organisational responses to changing market conditions

In the light of the preceding discussion it seems reasonable to ask why the societies should now deem suburban estates, once viewed as prime lending areas, as problem estates. The answer lies in the history of development of these suburbs and in the financial development of the societies themselves. Many of the estates built in the post 1970 period in the New Towns of Tallaght and Clondalkin were built at a time when the absolute numbers of houses being built was historically quite high. Emphasis was placed on the provision of cheap housing and many of the estates exhibited poor quality finish and design (Jennings 1983, 44). At the same time the building societies were experiencing significant growth in the inflow of new funds. Legally restricted to invest ing the bulk of their funds in the mortgage market the societies were keen to invest in these new suburbs without differentiating between areas. Managers admitted that faced with high inflows of funds they were under pressure to lend on any suitable property. In this context, the newly developing suburbs were deemed eminently suit able for advancing funds. Yet, the 1980s witnessed a reversal of trends in the housing

market and mortgage market. Throughout the 1970s house price inflation considerably outpaced changes in consumer prices whilst in the 1980s the reverse was true. For the building societies, the 1980s were a period of change. The substantial increase in net inflows which occurred in the 1970s was replaced by a decline in inflows, in real terms, throughout the 1980s (Murphy 1990). The societies faced increasing competition in the

mortgage market, especially in the more lucrative high status sector (Davy, Kelleher and McCarthy 1987). The profits on the societies' mortgage business dwindled (White 1989). The government responded to the problems of the societies by introducing the Building Societies Act (1989) which gave the societies freedom to engage in property development, property services and financial services etc.

The societies' organisational response to these far reaching changes was to implement flexible lending strategies. Flexibility was introduced by simplifying the lending criteria applied to individual mortgage applicants and by investing greater responsibility in the branches in their daily operations. The societies' managers, recognising that legislative changes would allow them to invest in areas outside of housing, perceived a geographi cal variability in lending risk and as a consequence viewed some relatively modern suburban owner occupied housing in large homogeneous estates as constituting a poor risk. This was especially true of low-income owner occupied areas. Having identified poor risk areas the societies adopted cautious lending practices aimed at minimising



34 Murphy

their exposure to mortgage losses. The societies did not place an embargo on the flow of funds into these areas rather they implemented more cautious lending conditions thus reducing the amount of funds given on each new mortgage. The incremental nature of this policy holds advantages for the societies since it allows them to reduce their commitments in an area whilst safeguarding existing investments by not undermining the local housing market. This gradual process also allows the societies to keep their options open, allowing them to change their policies over time. Whilst such a process may not constitute formal redlining, it can be argued that the institutional practices (granting advances worth a lower percentage of the valuation etc) generate difficulties in these areas.

Conclusions The wider implications of the survey findings could be developed to assess the degree to which head office policy has been fully implemented at a local level and to examine the extent to which prospective house buyers have been affected. Yet, the identification of an evident shift in senior managers' perceptions of the suburbs as lending areas, and the resultant implications for coporate lending policies, was highly significant. The desig nation of relatively new suburban owner occupied estates as poor lending environments strikes at the very heart of owner occupation. The operation of cautious lending practices makes entry into these areas more costly for households, especially low income households, and affects the capacity of existing owners to sell and realise capital gains. Work by Murphy (1990) has shown that households in these designated areas have suffered capital losses whilst Jennings (1983) has shown Dublin's western suburbs to be part of a low price inflation sector of the housing market. Thus, it may be argued that the societies' policies represent little more than a recognition of the fact that owner occupation is a fragmented tenure. Not all home owners are in a position to avail of the benefits afforded by this tenure and lending risk varies over geographical space.

With respect to the societies' lending practices, it seems clear that the changes occurring in the building society movement in Ireland has prompted a re-evaluation of what constitutes ' safe' lending environments. The adoption of more sophisticated and spatially flexible lending strategies by the societies represents a break in their traditional perceptions of the suburbs as an unproblematic lending environment. Flexible lending strategies are consistent with the societies' desire to maximise profits and to invest in areas outside of housing with higher financial returns. Whilst such practices meet the needs of the institutions, they can have serious deleterious effects on home owners in estates viewed as poor risk areas. Significantly, the implementation of spatially flexible lending strategies in Dublin has broken the simple bias of mortgage flows towards the suburbs and threatens to undermine the perceived privileged position of some suburban home owners.

Notes

1 Included in the interviews were three Managing Directors, an Assistant General Manager, two Mortgage

Managers, a Marketing Manager and a Training Officer.

2 Significantly, whilst it has been assumed that societies operated restrictive practices in Dublin's inner city

housing market (see Baker and O'Brien 1979 and Blackwell 1988) this finding represents the first

admission of such activities on the part of the societies.

3 Since the 1950s a number of cash grants have been available for first-time buyers of new houses. In some

instances these grants were quite substantial (eg the ?5,000 Surrender Grant-a grant given to local

authority tenents on surrendering their council houses and buying private houses). The societies' man

agers stated that the value of a house was set by the second-hand market and thus the price of new houses




had to be discounted by the value of these new house grants in order to arrive at a true value of the

property. 4 The Dublin region includes Dublin County Borough and Dublin County including Dun Laoghaire

Borough. 5 It should be noted that up to 30 per cent of house purchases in any one year are financed without recourse

to lending institutions and this is especially significant in rural areas.

Acknowledgements I would like to acknowledge the cartographic assistance of Maura Pringle (Queens University, Belfast) and

Jane Pugh (London School of Economics). I would also like to thank Andrew MacLaren (Trinity College,

Dublin) for his support and advice.

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