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Brown pinpoints UK housing market as stumbling block for Euro entry

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  • 17/06/2003
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Like a father speaking to his child, Chancellor Gordon Brown's ruling on the UK joining the Euro was...

Like a father speaking to his child, Chancellor Gordon Brown’s ruling on the UK joining the Euro was no, not now, but maybe later. Like any shrewd parent, Brown gave no real indication of when later would be, although another assessment of the situation is planned for next year. However, it is very unlikely the UK economic situation will have been manoeuvred to a position sufficiently close to that of the Eurozone for Brown’s five tests to be met by then.

The housing and mortgage market is proving to be one of the major thorns in the side of the UK’s entry into the Euro, and lack of sustainable convergence between the UK and the eurozone economies is holding us back.

Not only do we have a higher percentage of homeowners in the UK than in other European countries, but the level of borrowing and the number of people with variable rate mortgages are also a lot higher. The Royal Institute of Chartered Surveyors expressed the problems this creates in its June research document, The Euro and the UK housing market: ‘Around 70% of households in the UK own, or are in the process of buying, the home they live in. By contrast, home ownership in France is around 60% and in Germany it is around 40%. Furthermore, around 70% of mortgages in the UK are based on variable rates. This means that for the large number of households which have a variable rate mortgage, interest rate changes have a large impact on their available income after mortgage costs, and hence total consumer spending.’

With interest rates in the Eurozone 1.75% below the UK Bank Base Rate of 3.75%, a move to the Euro would lead to a drop in rates for the UK. Although this would give a significant boost to the housing market, it would not come without problems. A commensurate rise in inflation was seen in Ireland when it joined the Euro, and it would create similar problems in the UK economy. Any sudden rise in UK house prices would also exacerbate the threat of a housing crash in a market which is already at the forefront of continental increases.

To curtail the impact of interest rate changes, Brown would like to see the UK mortgage market move away from short-term deals towards long-term fixed rates. However, the report commissioned to examine the viability of such a move is not due until November, and any subsequent move by the market in that direction would take a number of years to establish itself.

Later may still be some way off, but it is unlikely the conditions for Euro entry will ever be perfect. If, and more likely when, we move into the Euro, it will be a nervous time for many.

Gordon Brown’s five tests

1 Is there sustainable convergence between the UK and the eurozone economies?

2 Is there sufficient flexibility in the UK economy to respond to shocks if it joined the eurozone?

3 What will the effect of the Euro be on investment in the UK?

4 What will the effect of the Euro be on the UK financial services industry?

5 How will the Euro affect UK unemployment and prosperity?

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