Scottish Housing Market Rebuilds After Collapse in Spring

Scottish Housing Sales Market Review - Autumn/Winter 2020

"Our regular Market Briefings series demonstrates the impact of the global pandemic on our local housing market. We have had a good return to business since lockdown ended in June and the strong economic fundamentals of the market going into this crisis prevented a steeper slide. House prices have also held up better than expected. We do expect market conditions in 2021 to be continue to be tough, even with a vaccine, as the country regathers itself – we expect both transactions to again drop next year, but more moderately than this year, and we also anticipate a small drop back in average house prices before recovery from 2022.”

Dr John Boyle, Director of Research

KEY FINDINGS:

• Surge in property listings and house sales since lockdown ended
• Sales to September down 35% year on year
• Sales by year end likely to be down at least 25% year on year
• LBTT returns down 34% in first three-quarters of 2020
• House prices grow by a little under 2%
• Rettie forecast average house prices to rise 11% in 5 years

Rebuilding a Market

Increasingly, we have become used to events being described as, ‘once in a generation’, or ‘exceptional’, or ‘unprecedented’. This is often an exaggeration but not this time. The Covid-19 pandemic and subsequent lockdown has been unusual in the sense that it was a health intervention into the market rather than a behavioural market response. The lockdown restrictions effectively saw both the rental and sales market frozen over the usually active Spring market. After 3 months of isolation and introspection, both the sales and rental markets have seen sharp increases in activity as restrictions eased and the personal resolutions made during lockdown about lifestyle and aspirations were put into action. This has seen listings of new properties for sale in Edinburgh and Glasgow jump to levels well above last Summer/Autumn, and rental demand and activity is also strong.

Looking ahead, there can be no doubt that with uncertain economic and political conditions ahead, there will be more testing times in the market. However, as many households have come to realise during the lockdown, a home is now, more than ever, not just a place to lay your head. As society adjusts to a Post-Covid world (or perhaps Living- With-Covid world), the property sector is likely to feel many of these new realisations most acutely.

The Covid Effect

An Unprecedented Event

The Covid-19 pandemic and subsequent lockdown has created a market intervention unlike any experienced before, with transactions being constrained by state intervention on health grounds rather than economic conditions driving consumer choices, as was the case during the Global Financial Crisis (GFC). While we are still navigating the pandemic and its potential economic and social consequences, so far, the Scottish property market has experienced a markedly different pattern of activity compared to previous market downturns.

The first thing to note has been the sharp fall and then recovery in activity. Over the course of 2018 and 2019, the Scottish market had seen a plateauing of transaction growth after a period of strong growth and this trend had continued into the start of 2020. With the effective closure of the market under the lockdown restrictions, transactions almost ceased completely, with just over 100 registered sales in April across Scotland when there would typically be over 8,000. This fall was more precipitous than during the GFC but the recovery was almost immediate after lockdown lifted at the end of June. New properties coming to the market surged in the wake of lockdown, with the pent-up activity from the Spring market displaced into the Summer months. Property listings in the weeks after lockdown in Edinburgh and Glasgow surged 50% to 100% higher than the same time in 2019. This supply meant that by September registered sales activity was at parity with September 2019, although the cumulative number of registered sales to Q3 remained -35% down. However, due to the lag between sales being agreed and registered, the true level of the market recovery will likely not be seen until the full year figures for 2020 are published.

One similarity between current market conditions and previous downturns has been the robustness of house prices. Much like during the GFC, house prices in the wake of the lockdown have not experienced significant downward movement and have even seen growth in some localised markets. Pent-up demand, combined with people reconsidering their life aspirations has supported sales values.

Looking ahead, there remains much uncertainty as the furlough scheme comes to an end and Brexit moves back into the headlines. This said, the pandemic has made many households reconsider the importance of a home as more than just a dormitory and this is underpinning demand and movement in the market, as well as shaping the character and location of property being sought.

Forecasts

We have revised our forecasts since the lockdown phase, but not by much. We were correct in anticipating that there would not be the house price crash that some commentators were suggesting. Instead, house prices have risen this year to date, despite the collapse in the economy, as the surge in demand post-lockdown has met a surge in supply of properties coming onto the market. As the market moved into Autumn, this demand appears to have been largely sated in most locations and the market in some areas is now looking at over supply.


This will likely push back prices into next year, when coupled with stronger economic headwinds as a result of the ending of generous government support packages, will likely dampen sentiment further. However, the correction in house prices will probably be limited, as they were in 2008/09, unless there is a flood of distressed sales. With very low interest rates and the banks not as over-stretched as they were in the previous recession, we are not anticipating a high level of distressed sales, unless, for example. there is a marked and sustained increase in unemployment or a collapse in lending.

The main hit is likely to be in transactions. These are already -35% down this year to date. We would anticipate that they will be c.-27% down by the end of the year, with recovery unlikely next year based on current economic forecasts. Again, based on a gradual economic recovery from 2022, we would expect transactions levels to be back to 2019 trading levels by 2023, more pessimistic than our previous forecasts. This is broadly aligned with current Bank of England general economic forecasts.


A more optimistic forecast would see better recovery at the end of this year but it is difficult to foresee transactions being less than -25% down in 2020 overall. Our more optimistic forecast has transactions holding steady in 2021 before growing back sharply in 2022 and above 2019 trading levels before the end of that year.

A more pessimistic forecast would be that transactions will remain -35% down over the final few months of 2020 and decline further (-15%) in 2021 as recession bites. This would see the type of loss in activity last experienced in 2007-08. Recovery from 2022 is more limited. Any individual year since the 2008/09 recession has never been more than 16% growth year-on-year and averaged just over 4% per annum over 2010-19. This forecast would also be reflective of the previous stagnant pattern, with the housing market not back to 2019 levels even by 2024.