Brown launches reviews of loans and supply

The chancellor yesterday laid much of the blame for Britain's boom-bust economic history on the volatility of the housing market - and promised to find a way to stop it.

Mr Brown has ordered two reviews to study why Britain has so few long term fixed-rate mortgage deals and what can be done to increase the available supply of housing.

"Most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market," said the chancellor. "Housing finance needs to become more certain and planning more flexible."

About 70% of UK households are owner-occupied - a far greater proportion than anywhere else in Europe or in the US. Mr Brown pointed out that house prices have increased three times faster in Britain than in France or Germany over the past 30 years.

David Miles, professor of finance at Imperial College, has been called in "to examine the case for, and how, Britain can develop a market for long term fixed mortgages" like the 25- and 30-year deals commonplace on the European mainland and in America. The chancellor said the move was important, regardless of whether Britain joins the euro, but especially crucial in a single currency area with one size fits all interest rates.

Prof Miles said his study would focus on whether there was any "market failure" in the mortgage business: "What is striking is the fact that the proportion of long term fixed rates is so very different in the UK compared to the US or Europe. My role is to analyse why, and if the conclusion is that there is market failure, one of the roles of government is to put right market failure."

The mortgage lending industry was split over whether Prof Miles's review was necessary and alarmed at the prospect of the government wading in to change the way they sell home loans. Longer term fixes could mean less remortgaging, which at present accounts for 50% of home loan business. Ray Boulger of mortgage broker John Charcol said it was "unclear" how longer term mortgage deals would ease demand for housing. "It will not build more houses."

The Halifax, Britain's biggest lender, insisted there was little demand for long-term fixes. It had only 300 takers for its most recent 10-year fixed rate deal.

Cheshire Building Society is the only lender offering a 25-year fix, pegged at 5.89%. There are "windows" when borrowers can escape penalty free, but early redemption costs are high. Even after 16 years, getting out would cost 4% of the total loan.

David Macmillan, the sales and marketing director at Standard Life Bank, said there was substantial demand for long term certainty and blamed borrowers' and mortgage brokers' reliance on league tables which highlight only the cheapest deals for their lack of popularity.

Standard Life sold 6,700 25-year mortgages in one limited offer last February. "Many of those who took one out were those who had got burned with 15% mortgage rates in the 1990s," he said. "They wanted certainty." He said borrowers needed educating about the advantages of long term deals and the mortgage industry had to question the way in which it sold loans. "The emphasis is always on cheapest is best, but we would say, 'is it?'."

In a second move to cut housing volatility, Mr Brown has appointed the former CBI economist, Kate Barker - now a member of the monetary policy committee - to look at what the government can do to increase housing supply.

The chancellor also announced he was freezing stamp duty thresholds on purchases. Lenders had been hoping for a big rise in the £60,000 purchase price where the tax bites. "That threshold has been in place for 10 years', said Philip Williamson, chief executive of Nationwide. "House prices have doubled since then, and the threshold should be doubled, too, as a help for first-time buyers."