Home buyers 'face euro uncertainty'

DITCHING the pound for the euro would lead to new uncertainty for British homeowners more vulnerable to shorter-term interest rate changes than their French or German counterparts, the Council of Mortgage Lenders warns today.

The problem is that Britain has a unique combination: more people own their homes than in France or Germany, and more UK homes are paid for with variable-rate mortgages.

Homeowners here are therefore more vulnerable to interest-rate changes than Continentals, who tend to go for fixed-rate loans. The Bank of England, however, is more likely than the European Central Bank to consider the interests of homeowners when setting interest rates.

"If the European Central Bank sets interest rate levels that are not appropriate for British domestic economic circumstances this may be more destabilising for the UK because the disposable incomes of a larger proportion of people are rapidly and directly affected by rate changes," says a study of mortgages and the single currency by CML economist Fionnuala Earley.

The current euro-zone interest rate is 4.5%, compared with 5.25% in Britain, so to adopt the euro now would create a housing boom. On the other hand, once inside the single currency house prices could veer down as well as up as the ECB sets interest rates to suit several economies.

Earley notes that low and stable interest rates are encouraging UK borrowers to go for the most attractive starting rate of interest, taking a chance on how rates will move over the life of the loan. About one fifth of British mortgages and just over a quarter by value are at a fixed rate, and fixed-rate deals as a proportion of new loans fell from more than half to less than a third between 1998 and 1999.

The Council of Mortgage Lenders represents banks and building societies which provide about 98% of residential housing finance, and has no axe to grind on the euro.

Housing finance is listed with lower unemployment rates among "structural" differences between Britain and euro-zone economies. "The structure of housing finance in the UK also makes a difference," says Earley, "and is an area where there may be difficulties for the UK under a single monetary policy".

A sharp increase in interest rates now would not do as much harm as during the 1980s, the CML says, because while prices are rising strongly people are not buying and selling at the same rate or going as deeply into debt.

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