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The Government Advances to Settlers Act, 1894, marked the inauguration of a series of schemes designed to provide assistance to settlers for the development of their holdings, and, although the original Act has been amended and extended in many directions since 1894, the underlying principle has always been the development of the resources of the country, both from the point of view of production and of social development.
The growth of the system has been progressive throughout the years, and the provision of advances through a State organisation has been extended from time to time to include:—
(a) Advances to settlers on the security of farm property for re-financing and development purposes, including an extension of the system under the Rural Advances Act, 1926. (b) Advances to workers for the purchase and erection of workers' homes, either in rural or urban areas. (c) Advances to local authorities to finance the construction of roads, bridges, and for the provision of other civic amenities. Prior to 1934-35, these schemes were administered by the State Advances Office, a Department of State having a centralised office in Wellington, and, in addition, the Department administered various other loan and investment accounts aris- PAGE 66 ing from other Government activities, including the administration of the Housing; Act, 1919, under which urban and suburban dwellings were erected by the Government for sale or leasing to workers.
A radical change was made in the constitution of the State Advances Office in 1934-35, when a public corporation called the Mortgage Corporation of New Zealand was established by Statute, with a subscribed capital of £1,000,000, of which half was held by the State and half subscribed by private investors in small sums.
The Corporation, which had extensive borrowing powers, commenced to function in July, 1935, and, in accordance with the provisions of the Statute, progressively took over almost the whole of the mortgages held by the State Advances Office, and the Discharged Soldiers' Settlement mortgages held by the Lands and Survey Department. The total value of the assets so transferred was approximately £55,000,000. Mortgage Corporation stock to an agreed-upon amount was issued to the Crown as consideration for these assets, the balance not covered by the issue of stock being treated as a contingent liability of the Corporation to the Crown.
Shortly after it commenced to function, the Corporation announced a lending rate of 41/8 per cent, for long-term mortgage finance on the amortization principle— a new low level which had never before been reached. Existing mortgagors were given the option, subject to certain conditions, of having their mortgages adjusted to this rate.
In July, 1936, the Government altered the constitution of the Mortgage Corporation and changed the name to the State Advances Corporation of New Zealand. The private share capital of £500,000 was cancelled, and shareholders were fully compensated by the Government, which now holds the total share capital of £1,000,000. The Board of the new Corporation was also re-constituted and now consists of two joint managing-directors who were joint managing-directors of the Mortgage Corporation, the Secretary to the Treasury, and two other directors.
Generally speaking, the newly-constituted State Advances Corporation assumed the powers of the Mortgage Corporation, and important extensions were made in certain directions with a view to providing additional finance to borrowers for specified purposes and under certain special conditions.
In order to encourage the erection of urban and suburban dwellings, and thus relieve the housing shortage, the Government, as a policy measure, authorized the newly-constituted State Advances Corporation to grant loans above the usual lending margin of 66 2-3 per cent. That this policy, as administered by the Corporation, has materially assisted in the acceleration of home building may be judged from the fact that, from the inception of the scheme in 1936, up to August 31, 1939, loans totaling £3,509,462 had been granted to 3849 applicants.
In the early 1970's it was proposed to divide the State Advances Corporation of NZ into Residential Housing mortgages and Rural Land Mortgages. The Housing Corporation Act 1974 and the Rural Banking and Finance Corporation Act 1974 resulted. There were provisions which vested all estates held by what was the State Advances Corporation in the Housing Corporation (Section 49) and the Rural Banking and Finance Corporation (later known as Rural Bank) (Section 41) upon registration of a certificate pursuant to the relevant section of the new acts.
In July 1986 Rural Bank held about 36% of all rural debt and the government had to consider some 'discounting' of the loans (before the crash of Monday October 19 1987, Black Monday), as they had done during the 1930's depression. GST started on 1 October 1986. Interest rates soared through the mid-1980s as the Reserve Bank attempted to tackle double-digit inflation.
By the second quarter of 1987, inflation was running at 18.9 per cent. Floating mortgage rates were above 20 per cent. The cost of servicing debt on assets that were falling in value — or in some cases worthless — was crippling.
RURAL BANK
As agricultural assistance was withdrawn following 1984, it became apparent that marginal and non-viable farm families were not protected by the government’s existing social welfare provisions. Therefore specific schemes were devised, including a Special Assistance to Farming programme which was in operation between 1986 and 1989. Provided certain criteria were met, grants were made to farmers who were in a critical financial position to provide for day-to-day living expenses. In this way, farmers and their families could receive a welfare benefit equivalent to the unemployment rate (Chadee and Johnson, 1994). An Exit Grant scheme was introduced in 1988, to provide assistance to non-viable farmers to encourage them to leave farming. As discussed above, the increase in assistance to the farm sector in the years up to 1984 impacted on land prices. The deregulation of 1984 lead rapidly to falling land prices, rising interest rates and an increase in farm indebtedness. By 1987, 23% of sheep and beef farms had less than 50% equity compared with 6% of such farms in 1984. Farm lending, at that time, was dominated by the government owned Rural Bank, and in 1986 this bank introduced a loan discounting scheme. Johnson (1989) reported that by 1988 approved applications involved average discounting of 33% of the original debt to the Rural Bank. Walker and Bell (1994) note that for most, debt restructuring and debt write-off followed, although for some selling was the only option - about 20% of the total debt owed by the farm sector was written-off, and about 15% of farms were sold.