Scottish Sales Review - Summer 2022

Your Questions Answered

• How does the uplift in house sales in rural areas compare to that in cities?

  We saw that the greatest growth in activity in 2021 compared to 2019 was in rural areas such as Aberdeenshire (38%), the Scottish Borders (24%) and Perth & Kinross (22%). This compares to Edinburgh (15%) and Glasgow (14%), for example.

• Has the shift to home working in Scotland been more pronounced than in the UK as a whole?

  Compared to other parts of the UK, home working has been more keenly embraced in Scotland. In fact, home working increased by over 200% in Scotland during the pandemic.

• How much cause for concern do the recent rises in interest rates and borrowing costs give?

  It’s important to bear in mind that while interest rates and the cost of borrowing are rising, they remain at historically low levels compared to the period preceding the Global Financial Crisis. In the mid-1990s rates were over 8% and, in the run up to the financial crisis, they were over 5%. Tighter regulation of the mortgage market, although since somewhat relaxed, has removed many of the questionable lending practices that led to the 2008 crisis.

• Are there any signs that the move to rural living is reducing demand for property in our cities?

  Although there has been an upsurge in demand for rural living, which, over the last 3 years, has led to a high level of average price growth in places such as the Scottish Borders (39%), Argyll & Bute (30%) and Dumfries & Galloway (27%), the demand for urban living remains strong. For example, over the same time period, average prices have increased by 27% in Glasgow and 13% in Edinburgh. Urban living remains particularly popular with younger people, who desire to be nearer places of work and amenity, and the rise of the Build to Rent (BTR) sector will provide high amenity urban living for this demographic, with over 13,000 BTR units now operating, under construction or in planning in Scotland, predominantly in Edinburgh and Glasgow.

• With the recent cap on energy prices giving more financial clarity for individuals, is this likely to have a positive effect on the property market?

  The UK Government’s recent announcement of the cap on energy prices will be welcome, although it is still a significant increase on energy bills from last year. Nevertheless, it should mean that people will have greater affordability to purchase and keep up with their mortgage and rent payments to a better extent than they would have without the cap. However, the cost of living crisis has a number of moving parts and the most significant concern to the property market is rising interest rates, which will feed through into mortgage rates and will likely depress the market for a time.

• Are there any signs of economic pressures leading to more properties from the buy-to-let market appearing for sale?

  The paucity of data on the private rental sector (PRS) in Scotland makes it difficult to answer this question. It does appear though that the market peaked a few years ago, when, according to the Scottish Government’s Scottish Household Survey, there were 370,000 households in the PRS in 2016. Tax and legislative reform saw this number drop to 340,000 in the latest figures from 2019 and these numbers are expected to fall further in 2020-22 - monthly letting listings are on a clear downward trend in Scotland over the 2020-22 period. Some of these properties have been sold as landlords have decided to exit the sector and benefit from the strong sales market. However, other properties will have been purchased by other landlords or moved to the short-term let sector, which is now under a regulatory regime that may see properties exit this market after an influx into it from 2014. Some owners may also choose to have their properties as second homes and enjoy the capital growth without having to be concerned about the future direction of legislation in Scotland, although this means foregoing an income return.

• How have the events of the last couple of years changed prospects for first time buyers?

  In recent years, first time buyers have benefited from relatively low mortgage rates; less competition from the buy-to-let sector; government programmes such as Help to Buy; increased exemption from property transaction tax; and enhanced savings after the Covid period that enabled them to put down higher deposits. According to Lloyds Banking Group, Scottish first time buyer numbers increased by 24% in 2021. However, the first-time buyer market is going to come under increasing pressure with rising interest rates and the likely decrease in mortgage products. This will affect the affordability and availability of lending. The UK Government has increased the Stamp Duty threshold on first time house purchases to £425,000 in England. In Scotland, this is currently £175,000 (on Scotland’s Stamp Duty equivalent, LBTT), but the Scottish Government may choose to increase this as a response to the rise in England.

• What implications (if any) might the recent change of occupancy in Downing Street have on the housing market?

  We are already seeing some early effects. The new administration’s tax cutting budget at a time of high inflation has been widely seen by many commentators, including the International Monetary Fund (IMF), as a serious mistake. The UK Government argues that, in time, these measures will boost the economy and improve earnings, making housing more affordable. In the short-term, the main effects seem to be rising interest rates and the withdrawal of mortgage products. Nearly 40% of the Scottish housing market is cash purchases and higher risk lending is at a much lower level now (at around 4% of total residential lending) than it was in 2008 (10% of total residential lending). These should act as shock absorbers in the market, but it is likely that we will see, over the next few months, a tightening of the mortgage market, which will impact on transactions and quite possibly house prices too.