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Last Updated: Friday, 6 June, 2003, 07:47 GMT 08:47 UK
Euro entry: voting with your mortgage
By Stephen Coulter
BBC economics analyst

Could the British householder have the final say over the five tests for euro entry after all?

The likely shelving of any referendum on joining the euro might seem to have scuppered any chance of the public of having their say until the next parliament. But maybe they have more influence than they think?

The answer to this lies in the Treasury's apparent disquiet over whether the UK economy is compatible with that of the eurozone.

Achieving convergence with euroland is the first and probably most important of the five tests. Without this, joining the euro could be a disaster.

The big spanner in the works is the UK's notoriously volatile housing market.

Restricted freedom

The impact of the housing market's gyrations on economic stability will become much more pronounced inside the eurozone.

Outside the eurozone, with an independent central bank, the UK can adjust rates to choke off a housing boom if need be.

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But interest rates in the eurozone are much lower than the UK's, and this could spark a dangerous boom if we joined.

Mr Brown is sufficiently worried about this to have commissioned a detailed Treasury study on housing as one of the 18 supporting papers to be published alongside the five tests.

In his Budget for 2003, Mr Brown also announced several other studies - due next year - to look at ways of making the UK's housing market more like the eurozone's.

He said: "Housing finance needs to become more certain and planning more flexible."

Variable rates

One of these will look at ways of boosting the supply of new homes. Persistent housing shortages have caused prices to soar.

Another will aim to encourage people to take out more fixed-term mortgages.

The preference of UK homebuyers for short-term, variable rate mortgages is often cited as a key peculiarity of our housing market.

It causes much greater fluctuations in house prices than on the continent, and leaves buyers more vulnerable to repossession.

Other differences include:

  • There are fewer restrictions on credit in the UK, allowing lenders here to offer high loan to value ratios - a smaller income buys you a bigger house. UK owners have higher mortgage debts as a result.

  • UK homebuyers remortgage more, and they use the cash to fund their personal spending.

  • The way banks finance mortgages is also different. European financial institutions often finance mortgage lending by arranging a bond. In the UK lenders use savings deposits lent out as mortgages. This implies that monetary shocks like changes in interest rates will hit the UK and euroland in different ways.

    But some sceptics question whether it is right to try to interfere in the market in this way, and whether fixed rates are really suitable for the UK.

    People power

    Lenders already offer 10 or 15-year mortgages, but they are not very popular because people are simply unwilling to surrender flexibility for security.

    Fixed rate deals also tend to be more expensive than variable rates, as arranging their financing exposes lenders to greater risk.

    Two-year mortgage deals are currently offered with rates of between 3% and 4% (the base rate is 3.75%), while 10-year mortgages are typically charged at more than 5%.

    UK inflation and interest rates have been volatile in the past, making house buyers reluctant to lock into fixed-rate mortgages that might be out of line with rival deals after a few years.

    Anyone who bought a five-year fixed rate deal two or three years ago - when base rates were around 5% - would almost certainly have lost out since then, as the Bank of England has brought rates sharply down to cope with the slowing UK economy.

    Whether the government can get UK house buyers to change their ways remains to be seen.

    But until things change, single-currency advocates may find that the British public has already voted on the euro - with its mortgages.


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