Tuesday, June 10, 2003

The government's publication of the results of the five economic tests for entry to the Euro has exposed the political nature of the exercise. Four (or is it two?) of the economic tests have failed, but the government's response is to put measures in place to help ensure that the tests can be passed in future. It is striking that these measures were not put in place several years ago. The reason they were not is, of course, that the five tests have served merely as a screen to cover the politicians' prevarication.

What we have needed all along - as I have mentioned before - is a cost-benefit analysis. The five tests did not produce that; they were narrowly focused tests, some of which were bound to fail (if it suited the government for them to do so) because they asked questions along the lines of how long is a piece of string. We don't need five tests to tell us that the Euro will reduce our own government's flexibility to manage the economy - we know that it will do that. What we need to know is whether the costs of that are more than offset by the benefits of a more certain economic environment. For all the huff and puff of the Chancellor's announcement, we are no nearer knowing the answer to the question that really needs to be addressed.

Monday, June 02, 2003

After a brief lull in the housing market at the start of this year, house prices have once again started to rise quickly. At present, average house prices seem to be running at about 10-15 per cent above trend, indicating that a downward adjustment is likely. The market has been buoyed in recent months by low interest rates, but it seems that the turning point will come sooner rather than later.

The overall increase in prices masks some regional disparities. In some parts of the South East prices have started to fall, while in other regions prices are still rising quite steeply. This is characteristic of a ripple effect that is quite often seen in UK house prices - changes seem to emanate from the area around London, and then spread out over a period of about 18 months to the more peripheral regions. House prices generally are, of course, higher in the South East than elsewhere - but householders everywhere should be aware of the dangers of negative equity that adversely affected almost 2 million people in the late 1980s.

Some commentators have been alarmist - with Andrew Oswald notably predicting a 30% fall in house prices over the next two years. This is, I think, a little too pessimistic. I would expect the adjustment to be about half that. But even my more modest forecast implies that large numbers of people will be hit hard by the housing market downturn. And, with rates already very low, scope for further help in the form of interest rate cuts is limited.