Scottish Housing Market Review

Detailed Analysis by Topic

• A Market Revival - Collapse & Recovery

  The Scottish market has seen exceptionally strong price growth in the past 12 months, with the average house price now exceeding £200k for the first time on record after recording double digit annual price growth. Within the main cities, there has also been strong annual growth of around 7-8% in the past 12 months compared to the previous 12 months.

  As we will detail later in this review, the strong price growth over this period has been contributed to by an imbalance between demand emerging in the market after lockdown, especially for properties with outdoor space and lifestyle amenity, and a lacklustre return of supply to the market, especially in areas of high demand. This constrained supply is manifested in the reduced number of transactions in the market compared to pre-lockdown levels.

  Across Scotland, the past year (to year Q1 2021) from lockdown has seen -6.4% fewer sales than the year preceding lockdown. This compares to the -25% contraction in the year to Q3 2020, which was dominated by the Q2 restrictions. A large part of this narrowing in the transaction shortfall over the past year has been down to the exceptional levels of activity that were seen in Q4 2020 and Q1 2021. The market in Q4 2020 had +28% more activity than the same period in 2019, whilst Q1 2021 was up +55% year-on-year. Yet despite this strong recovery, demand continues to outstrip supply.

  In Scotland’s major cities, the picture has been more mixed. Aberdeen continues to see difficult market conditions ,with average house prices over the past year down compared to pre-pandemic levels. By contrast, both Dundee and Glasgow have seen growth around 8% year-on-year. Transaction activity in both these cities has also rebounded faster than Aberdeen or Edinburgh, resulting in both Glasgow and Dundee recording positive increases in overall market turnover in the past year since lockdown, compared to the year before lockdown. Meanwhile, Edinburgh remains down in terms of transaction count (-11.1%) and market turnover (-5.8%), due in part to a lack of stock coming to the market in the city and the pull of locations within the commuter hinterland.

  As we progress through the Summer months, we expect strong transaction activity to continue as restrictions ease further and the economy opens up. Without a significant change in supply within the market, the bullish conditions look set to continue in the short-term.

• Supply & Demand - An Unbalanced Market

  The past year saw the taps of housing supply switched off by lockdown restrictions, however, rather than dampen demand, the pandemic fostered a re-evaluation of living priorities and, for fortunate households, a period of enforced saving. The net result has been the building up of pressure and demand during lockdown, which has now sustained one the most buoyant periods of market activity since before the global financial crisis. Anecdotally, many agents with 20 to 30 years of experience cannot remember a time with so much demand in the market. This anecdotal evidence is supported by statistics.

  Using the Capital as a case study, with its a diversified market comprising dense flatted areas and suburban family markets, the disparity between supply and demand since lockdown is evident. In Figure 5, the number of new applicants registering for Edinburgh homes with Rettie is shown. From this, it is possible to see the seasonal patterns preceding the lockdown and the low level of new applicants that resulted from the restrictions. However, what is clearly visible is the rebound and weight of new applicants registering once restrictions were lifted, and how this persisted at higher than pre-lockdown levels through 2020 and in to 2021.

  Contrasting with the high demand that entered the market once restrictions were lifted has been subdued supply. Figure 6 shows that the number of new listings coming to the market in Edinburgh before the pandemic were lower than the previous year. Following the lockdown, there was an increase in supply as backlog of supply that would have come to the market during the busy Spring period was finally launched. As this backlog of supply eased new supply has settled back to more seasonal levels.

  When these two indicators are combined, we can more clearly see this contrast (see Figure 7). Using a 12-month rolling total of new applicants and new supply indexed to the 12 months preceding the pandemic, then this contrast is starkly shown within the Edinburgh market. While the pandemic initially subdued demand, by July new applicants in the previous 12 months were already higher than they had been pre-pandemic. This has continued to rise, meaning that in the year to April 2021, applicant levels were 47% higher than the 12 months before the first lockdown. By contrast, analysis of all properties listed in the Edinburgh market, shows that it has taken a year for supply within the market to recover to pre-pandemic levels, let alone keep pace with increased demand. This fundamental imbalance has been the cause of rising prices in the market over the past year.

• Market Composition - Sharpest contraction in lowest value properties

  A key issue over the past year has been the availability of the stock to meet the wave of demand that re-entered the market after lockdown restrictions were lifted. Based on the number of properties listed on the major portals in 2020, there was a -13% decrease in stock brought to the market compared to 2019. This drop in supply has been a key factor in driving up prices.

  Looking at the composition of homes coming to the market reveals much about the impact of the pandemic on different locations and buyer segments across Scotland. In 2020, the number of apartments that came to the market was down -11% on 2019 levels. The in-demand family market, popular with buyers looking to gain more space, saw the number of homes -14% lower than in 2019. Of the different property types, detached homes saw the greatest year-on-year decline in supply, down -16%.

  Areas which have a higher concentration of family housing, have seen the greatest fall in supply. This includes the likes of Midlothian, East Lothian and West Dunbartonshire. In contrast, the major dense urban settlements of Edinburgh and Glasgow had a lower drop in supply than more suburban and rural council areas at -9% and -10% respectively.

  Perhaps most notable in terms of supply, has been the difference across price brackets. The largest contraction in supply was in the volume market under £250k, which contacted -16%. Moving up the price range, the £250k to £500k band contracted by just -2% year-on-year. At the higher end of the prime and family market, between £500k and £750k, there was 6% increase year-on-year, while the £750k to £1m market saw 60+ more sales in 2020 vs 2019, equating to a +19% increase. This reflects the fact that more discretionary, higher equity and more financially secure households were empowered to move over the past year.

• LBTT Revenue - Revenue skewed to higher values

  The patterns seen in the sales market in the financial year 2020/21, combined with the Land & Buildings Transaction Tax (LBTT) holiday, has implications for revenue generated. The number of LBTT returns received in FY2020/21 were down -8% overall for the year compared to FY2019/20. However, the distribution of returns paints a variable picture of market operation at different price brackets. LBTT returns for transactions under £145k in FY2020/21 were down -16%, twice the fall of the wider market. Also down were sales in the £145k to £250k bracket which contracted -7% year-on-year. This saw the contraction of all LBTT returns under £250k by -12%, despite the LBTT holiday, which allowed a nil return up to £250k. By contrast, the market over £250k saw a +10% increase in LBTT returns, with sales between £325k and £750k, and over £750k, up +16% and +17% respectively. This contrasting pattern at different price bands points to the different impacts of the pandemic across society by life stage and income.

  In terms of revenue, the LBTT holiday reduced income from transactions under £250k in FY 2020/21 by -86%, from £28m the year before to £3.8m. There was also a fall in revenue in the £250k to £325k, despite the strong recovery in transactions in late Q3 and Q4 2020/21. A comforting fact for the Scottish Government was the increase in higher value transactions, which has gone some way to filling the deficit created by market contraction and the LBTT holiday. LBTT revenue from transactions over £325k increased by +6% in FY 2020/21, meaning the overall LBTT revenue was down -10% from £287m to £257m. The combination of these patterns meant that sales over £750k contributed over a quarter of all LBTT revenue, up from c.21% the year before, and the contribution of sales over £325k rose from 76% in FY2019/20 to 90% in FY2020/21.

  For the Scottish Government, the strong performance of higher LBTT bands will have been welcome, however, with 90% of revenue coming from the £325k+ bracket, which accounts for 12% of sales, this concentration further exposes revenue to any fluctuations in this part of the market.

• Lending Landscape - Rising mortgage approvals fuel activity

  A core driver of the housing market is lending, as this determines buyers’ financial reach and affordability, as well as the cost of homeownership relative to other tenures. From the double-digit interest rates of the 1970s to 1980s, through to our current historically low interest rate environment, mortgage lending has been critical and this has remained the case in the past 12 months.

  Over 2020, the number of 95% loan to value mortgage products, popular with first time buyers (FTB), plummeted to single figures. At the same time, the cost of borrowing at higher LTVs also increased dramatically. Combined, this higher cost and lower availability with the job and economic insecurity felt by many younger households during the pandemic and the contraction in urban and first or second mover homes can be understood. Conversely, more established households with built up equity and saving money during lockdown have taken the opportunity to move.

  The total value of mortgage lending shows that, in Q2 2020, both FTB and home purchase lending fell to their lowest levels since 2013. Post lockdown, there has been a resurgence with the value of lending to FTBs and home movers reaching their highest level since 2007, while re-mortgage lending is at its lowest level in 5 years.

  This year, the Government’s backing of 95% LTV lending has seen an increase in high LTV products in the market. So far in 2021, there are now over 100 high LTV products available, however, only around 40 or so are actually using the Government Scheme suggesting there is broader confidence in lending.

  The combination of these additional products and strong market conditions look set to support greater market engagement across price bands, rather than the concentrating activity in higher value or more mature life stages.

• New Homes Market - Filling the gap

  The new homes market in Scotland has seen strong price growth over the past year, with the average price in 2020 reaching £260,000, up 2% on 2019.

  In Q1 2021, the average new build price was at a new high of £277,000, up 10% on Q1 2020.

  The number of new homes sold in 2020 was down -23% year-on-year, as lockdown restrictions closed sales cabins and prevented site visits.

  So far in 2021, the new homes market has seen a strong up turn, with the number of sales up by a third compared to Q1 2020.

  Part of the driving factor behind this upturn in the sector has been demand for family housing and relatively constrained supply available in the second-hand market.

• Scottish Average House Price Forecast

  Prices expected to resume an upward trend

  In March 2021, double digit annual price growth saw the average house price in Scotland exceed £200,000 for the first time. Against this backdrop, we expect strong positive growth for the rest of the year as we emerge from the pandemic before a cooling in 2022. Our central forecast for 2021 is +8% price growth in Scotland. This level of price growth will be the highest on record since 2007.

  Over the next 5 years, we forecast a 23% increase in the average house price as the initial pandemic price growth cools and returns to longer term trends. This pattern of five-year growth is higher than the previous five years, which have been around 11%.

  Looking ahead, there remain many challenges in the market, including the shape of post Covid-19 recovery, the adjustment to Brexit and political and constitutional issues. This makes forecasting a difficult art and we will need to maintain a close eye on the key market drivers going forward.