EMU threatens housing boom and bust for Britain

The UK mortgage market may need a big shake-up before Britain is ready to join EMU. Paul Slade reports.

Bringing UK interest rates into line with continental ones to qualify for European Monetary Union in 1999 could bring a return to boom-or-bust for the UK housing market, a new report warns.

Geoffrey Meen, of Oxford Economic Forecasting, an independent think-tank, says UK interest rates would have to fall by 2 per cent or 3 per cent to match those elsewhere in Europe. This could lead to renewed volatility for UK house prices, he argues.

Cancelling out the effect of a 2 per cent drop in interest rates on joining EMU would mean an extra 3p in the pound on income tax. His preferred solution is a small subsidy for those taking a fixed-rate loan, to encourage UK borrowers to act more like those on the Continent. About 80 per cent of mortgage debt in the UK is variable rate, against 50 per cent in Italy and just 5 per cent in Germany and France. The higher the proportion of variable-rate debt, the more the country's housing market will react to interest rate changes.

Mr Meen says the cost of fixed and variable-rate loans at the moment are close enough to need only a small subsidy, and he suggests mortgage interest relief (Miras) should be given only to those with a fixed-rate loan. But some mortgage experts are sceptical. Ian Darby of independent mortgage advisers John Charcol doubts whether Miras alone would provide much of an incentive, particularly as the value of the relief is to drop to 10 per cent on 6 April this year. He says: "If you did have 2 per cent off interest rates, you could buy a five-year fix at about 6 per cent."

Simon Tyler of Chase de Vere Mortgage Management believes the real impact of Britain joining EMU for UK borrowers would be other European lenders entering our market.

He says: "Once we'd been in EMU five years, it will be a more competitive market for borrowers as well. But, right now, we've got probably the most competitive mortgage market we've ever seen in the UK."