The volatility of the housing market was a major factor in yesterday’s decision not to join the euro just yet.

A Treasury report backing up the decision says that decades of low investment in new housing has fuelled much larger fluctuations in house prices than on the continent.

Until problems of housing supply are sorted out, Britain will find it difficult to meet the first of Gordon Brown’s five economic tests – that of convergence with European economies.

Research by the Royal Institute of Chartered Surveyors (RICS) prepared in advance of the Chancellor’s big euro decision on the ‘five economic tests’ shows that house prices would increase by a further 15 to 28 percent by 2006 and then crash if the UK joined the euro in the spring of 2005.

The RICS study said that early entry to the euro would set off a short economic boom, spurred mainly by increased consumer spending as the cost of mortgages falls.

Convergence

The 'not yet' verdict was presented along with a “clear path” message towards convergence and this will have a direct impact on mortgages, our investments and savings, and possibly the value of our homes.

The chancellor has long wanted more people to be encouraged to move to long-term fixed-rate mortgages so that the impact of interest rate changes on homeowner pockets can be reduced. Currently only 7% of mortgages are fixed interest types. Short-term loans make the housing market susceptible to interest rate changes.

Gordon Brown also plans to get more houses built during the period of convergence, reducing the demand and thus the present high growth in house prices. He is unlikely to move ahead fast with these changes however and has admitted that the "direction" was the important factor.

On breakfast TV this morning the chancellor was clear in his determination to converge and said that some of the changes would appear by the time of his next pre-budget report in the autumn. From this autumn report onwards the government’s inflation target will be based on the Harmonised Index of Consumer Prices instead of the Retail Price Index, which Mr Brown said would provide a more stable measure.

The HICP is lower than the RPI and if used for calculating pensions could result in lower pay-outs for index-linked pensions. The chancellor promised this would not happen for state pensions but it is likely that employers will take a different view, particularly with pay rises.

On the subject of pay rises, the chancellor said that future public sector wage deals would be more dependent upon regional conditions.

The process of convergence with the eurozone is also likely to restrain UK interest rates, hitting savers even harder. UK and European rates are closer than they were several years ago but UK rates are still at 3.75% while the eurozone sits at 2%. With the eurozone economy sluggish it is unlikely that the European interest rate will rise to meet UK’s rate.