European laws could kill off flexible mortgages

The government yesterday hit out at Brussels over planned new European credit laws which ministers believe spell bad news for the mortgage industry and borrowers in Britain.

The proposals for updating the European consumer credit directive are intended to give people a better deal but mortgage lenders say they could kill off popular flexible mortgages which allow borrowers to overpay, underpay or take payment holidays. These would effectively become unworkable because the rules would require the lender to provide advice every time a customer wanted to make use of the cash drawdown facility.

Consumer minister Melanie Johnson picked up the baton yesterday, travelling to the European Parliament in Brussels to tell MEPs that the British government has "serious difficulties" with some aspects of the proposals.

She said all mortgages should be excluded from the scope of the rules, adding that trying to include them within a "one-size-fits-all" directive "risks ending up with a regime which over-regulates consumer credit, while providing insufficient protection for mortgages".

Her comments came as a new report showed that house prices are continuing to surge, with £2,000 added to the value of a typical home last month - prompting renewed warnings yesterday about the growing risks of a property market crash.

Prices are rising at their fastest rate since the height of the last housing boom 13 years ago, said Nationwide building society, which issued the figures.

November's 2% rise in prices pushed up the cost of an average home to £115,761 and means the annual rate of price growth is running at 25.5%, the highest figure since 1989, said the society.

A month ago Nationwide said the housing market was showing tentative signs of slowing down, with prices up by a modest 1.4% in October.

Yesterday Alex Bannister, Nationwide's group economist, said: "The strong upward trend in prices continued in November with the price of the typical home up 2%, or just over £2,000, on a month earlier."

He added: "Given the strength of the underlying economy and that prices in many regions still look affordable, another year of double-digit house price inflation cannot be ruled out."

Nationwide's data prompted the second warning within 24 hours that the market's continued strong growth was increasing the chances of an early 1990s-style property crash.

John Butler, an economist at HSBC, said he believed house prices and consumer spending would slow next year, but added: "The threat of a crash has increased".

A new report from economic consultancy Experian Business Strategies, part of business information company Experian, estimates there is a 3 in 10 chance of the house price bubble bursting, bringing with it a return to negative equity and the threat of recession.

Peter Gutmann, associate director at the consultancy, said: "This is a worst case scenario. It would present a serious risk to UK economic prospects."