In June, Gordon Brown made a speech questioning whether the UK was ready for entry into the Euro. As part of that speech he announced that Dr Kate Barker, who had been the chief economist of the CBI and who is now on the Bank of England Monetary Policy Committee, would be producing a report on the housing market to 'conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK ... and on how we can produce greater stability in our housing market.' Earlier, in April, he appointed Professor David Miles, who has worked for Merrill Lynch and the Bank of England, to look into whether the government should encourage the use of long-term fixed-rate mortgages and, if so, how it should be done.

Both will be reporting to Gordon Brown in the next few weeks on what can be done to bring the British housing market into line with Europe. The 'unique' nature of Britain's housing market and how it is financed is perceived as being one of the barriers to the UK adopting the Euro and, so the argument goes, if you can bring this into line then the central reason for staying out crumbles. Politically, a lot rides on their findings. Defining the problem will be as important as any answers they might suggest.

They are likely to focus on the dominating influence of the housing market on the British economy, the level of debt that sustains it, the variable rates that dominate mortgage lending and the consequent amplification effect of any changes in interest rates–compared with other economies in Europe. If entry were to occur in the immediate future, then the current lower interest rates prevailing in Europe would be likely to heat the UK market even further. As the Euro applies a 'one size fits all' interest rate, a rate change that may only be a nudge on the tiller for France, might completely capsize the economy of Britain.

Why this should be so is not particularly to do with the high levels of home ownership in Britain. Contrary to popular belief, while the UK has a higher level of home ownership at 70% than the rest of 'old' Europe, it is not strikingly different. In France it is 54%, in Holland 50%, in Germany only 40% but in Greece and Spain it is around 85%–Germany is, in fact, the odd one out in having so few home owners.

What is different in Britain is not only the high levels of debt sustaining the market but also the dependence on variable-rate mortgages. The size of the variable-rate mortgage debt in the UK is apparently five times all the variable-rate consumer debt in the whole of the rest of the Euro-zone put together. As house prices have risen in the UK, a further distortion has appeared in the form of equity withdrawal – another name, in most cases, for recycling short-term credit card debt into a long-term mortgage. It is estimated that, over the last twenty years, 3% of UK household income has come from equity withdrawals; in other words, we have been spending 3% more than we earn and have a ballooning debt burden as a result. Over the same period, in Germany, France and Italy, 6% of income has gone into housing equity. Such very different market dynamics would appear to make Euro-entry without some sort of structural change very risky – hence the reports.

The challenge is twofold. First, to try and rein in the housing market or at least to stop it increasing further. How to do this without causing the whole economy to fall over will be stretching minds at the Treasury. The second is to wean the British off their dependence on variable rates and produce a fixed-rate mortgage product that will make the economy less sensitive to interest-rate changes.

Any attempts by government to restrain prices is always going to be hostage to the law-of-unforeseen-consequences as the effects of most taxes or restrictions are difficult to isolate. Capital gains tax on prime residences is one possibility that must have been considered. It may not work–Sweden doesn't offer much evidence that it does. It will also make labour mobility, already a real problem between the South-East and the rest of the kingdom, even worse; electorally it may also be the equivalent of Russian roulette–not a popular game with politicians. Stamp duty has been tried already but seems to have had a negligible effect; taken to an extreme, it could work but, again, the Russian roulette analogy comes to mind and what can happen, as in Ireland, is that the slowdown in turnover restricts supply and actually results in prices going up. Stamp duty is, however, nicely restricted to property–unlike interest rates.

The supply side of the equation has the most probable likelihood of success in the long term as the UK has a very low level of house building – 3100 per million as compared with 6000 per million in the US. The general relaxation of the planning laws and urban regeneration should eventually start to tip the scales towards supply rather than demand with a commensurate effect on prices. But this is long-term stuff and if the Euro is to be fixed in the near future – and politicians think in parliament-terms – then this may be too long-term a fix.

A possible short-term solution would be to tinker with the fuel supply by restricting the lending – specifically aiming at re-mortgaging and the more aggressive loan-to-value transactions. They might, for instance, allow a maximum of 90% loan to valuation for a first-time purchase but any additional loan might be subject to a loan-to-value limit of say 70%. There might be a further focus on the equity withdrawal issue which would seem to be doing so much damage to the long-term balance sheets of UK householders who are relying on property inflation to pay off their debts. This could take the form of capital gains tax on property gains but subject to roll-over relief, which would leave gains that are reinvested in property tax-free but attack money that was heading towards the travel agent or the new car; it would also have the advantage of not affecting job mobility.

Any such interference in the free market would be a new departure for government – at least in the post-Thatcher era; it would be tantamount to saying that consumers have been behaving in an irresponsible way over the last decade, which a glance at the growing pension problem would suggest has a grain of truth, and that government needs to play nanny. Perhaps consumers need to have a more direct link between action and effect, a connection that has been lost or blurred by interest-only mortgages where the consequences have been banished to the distant future when the cynical might add that neither current politicians nor the boards of mortgage lenders will be around. A tightening of repayment criteria may be on the menu.

All this deals with the levels of debt and the escalation of property values. However, it is neither of these that is the immediate problem for the Europhiles hankering after a single currency. The real problem for them is the variable nature of the interest rate, which means that any rise in Euro-rates would have a disproportionate effect on the UK consumer compared with his continental cousin. Dr Miles will certainly be looking at the Danish market, which is almost entirely financed on fixed rates based on a system of mortgages that are government-sponsored and securitised into long-term bonds–a pleasant consequence being an increase in supply of the equivalent of Gilts for pension funds hungry for fixed-coupon instruments. How you wean consumers off their current tipple of variable rates when they are currently so low compared with fixed rates is another matter and, if the idea is intended to result in a less volatile housing market, then the Danish model doesn't give much comfort. It is, however, cheap and transparent and could insulate the UK economy from any fatal shocks administered by Euro interest-rate rises.

These musings do raise the question of which is the dog and which is the tail. The assumption is that, in the current environment, the UK consumer is too sensitive to rate changes. The doctors' reports may well consider that the problem is that the continental consumer is not sensitive enough, and when the ECB either needs to touch the accelerator or stamp on the brake, not enough happens. Maybe it should be the Euro-zone consumers that are encouraged to gear up to raise their sensitivity. It's a nice thought but will probably remain just that.

Whatever the good doctors present to Mr Brown, it is unlikely to be a panacea–the problem is too complicated for that, the vested interests too powerful and the ripple-through effect potentially too destructive to anticipate really radical solutions. Mr Brown has to operate in a world in which his job depends on re-election and anything radical is going to hit hard where it politically hurts. He is nothing if not a pragmatist and, if his previous record is anything to go by, he will probably avoid the grand gesture in favour of stealth options that go below the consumer radar. After all, companies don't vote.

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