House prices are likely to suffer a price boom followed by a price bust if the UK ditches the pound ...
House prices are likely to suffer a price boom followed by a price bust if the UK ditches the pound for the euro, the Royal Institute of Chartered Surveyors (RICS) says.
According to RICS analysis out today, property prices might rise by as much as one-third by 2006, if the UK decides to join the single currency in two years time.
The analysis has been released ahead of chancellor Gordon Brown's speech today in which he will reveal the Government's decision on whether the UK is ready to join the euro or not.
In analysing the effects of joining the single currency, RICS estimates that house price might be 3% to 13% higher in 2005 than if the UK had chosen to keep the pound.
Alarmingly, this rise could be as much as 15% to 28% higher in 2006, it adds.
This would initially lead to a price boom, followed by a significant slowdown in the house market post-2006 as prices become unsustainable.
The reason for this, RICS says, is that - in terms of the housing market and mortgage debt - the UK is much more sensitive to interest rate changes than most euro area countries.
Some 70% of households in the UK either own, or are in the process of buying, the home they live in, compared to 60% in France and just 40% in Germany.
Added to the problem, around 70% of mortgages in the UK are based on variable interest rates.
Interest rate changes will therefore have a huge impact on a large number of households' available income after mortgage costs.
Effectively, these changes in interest rates also lead to fluctuations in housing demand and house prices as well as add to the current problem of house price volatility.
"The potential long-term benefits of euro entry for the economy may therefore be offset by greater housing market volatility. Moreover, after an initial economic boom, the UK faces the possibility of a slump in growth and house prices, as ECB interest rate policy will be based on economic conditions in the euro area and not in the UK," writes RICS.
To minimise the disadvantages associated with joining the single currency area, interest rates would probably need to fall sharply, RICS says.
Changes also need to focus more on mortgage issues, as UK lending practices differ significantly from the rest of the euro zone.
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