An Eventful Year

2022 was an eventful year by any standards. Russia’s invasion of Ukraine triggered a number of significant effects, with rising energy costs fuelling inflation and contributing to an ongoing cost-of-living crisis, while significant political upheaval during the year has led to economic turmoil.

As a result, Rettie are predicting a cooling in property market values and a contraction in activity to below pre-pandemic levels for a time. While demand in prime markets is forecast to remain robust, lending challenges for first-time buyers and second movers will impact transaction chains.

The market should pick-up again after 2024, when most of the fallout from events of this year should have washed through, but the world is an uncertain place just now and, as a result, forecasting change is a more difficult exercise.”

Dr John Boyle MRICS
Director - Research & Strategy

Key Findings

slowdown but no collapse infographic

Slowdown, but no collapse

Rises in interest rates and inflation are dampening the sales market, with sales in 2022, perhaps unsurprisingly, falling back compared to the high levels of pandemic-related activity in 2021.

demand still ahead of supply infographic

Demand still ahead of supply

Despite market challenges, we continue to see demand outstrip supply and remain above 2019 levels, with premiums over Home Report still being achieved in many markets.

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Impacts of Mortgage lending

Rising mortgage rates have seen payments on an average property in Scotland rise rapidly, with the theoretical buying power supported by average earnings falling by around a quarter.

Prices Dampening, Activity Falling

It seems clear that there is a wider market dampening effect on house prices caused by rises in interest rates and inflation, although this is only mild for now. In terms of market activity, sales in 2022 have fallen back compared to the high levels of activity experienced in 2021. This is not unexpected, as 2021 represented an unusual market, driven by pent-up pandemic related demand.

In the year to October, sales in Edinburgh were 11% lower than the same period last year, while Glasgow reported a 15% fall. It’s worth noting that while activity in the past year is down on 2021 levels, sales activity across Scotland remains 3.2% up on pre-pandemic 2019 levels.

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While there are undoubtedly many challenges facing the market, it’s important to highlight that, when accounting for inflation, the recent increase in property prices is less acute than previous housing bubbles. For this reason, it’s not anticipated that the market will see similar price corrections as previous cycles.

Demand Still Running Ahead of Supply

Over the last three years, Rettie have consistently registered a higher level of buyer demand than supply coming to the market. As the latest figures to November 2022 show, the gap between demand and new supply has narrowed. However, there are still more new applicants than new stock, which supports the modest level of price rises still being seen.

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Rising Cost of Borrowing

The combination of rising house prices and the recent spike in the cost of borrowing, means that the increase in the cost of borrowing has led to a fall in the buying power of the average household income by around a quarter.

buying power infographic edinburgh monthly mortgage payments infographic

This illustrates how the reach of many buyers, especially first-time buyers and younger households with less equity, will be impacted. As first-time buyers are often the most reliant on available lending and tend to lack the equity reserves of those already on the property ladder, this group is once again most likely to see a drop in market activity, which will have an impact on chains higher up the housing ladder.

However, it’s important to note that, when adjusting for inflation, mortgage costs have risen sharply, but they remain within historical precedence.

The New Build Market

Rettie has a market leading database tracking over 2,600 historic new build developments across Scotland. Using this resource, we’ve noted an upturn in discounts and incentives being offered to the market.

However, our own experience, in both the new build and wider markets, is that demand in Glasgow and Edinburgh remains high, especially in prime locations. This experience is borne out by the fact that premiums above Home Report are still being achieved by our sales teams, emphasising that not all homes are the same and knowledge of submarkets and geographies is crucial in understanding the changing market conditions.

Our Rettie Forecast

Looking ahead, there can be no doubt that the housing market is set to have a challenging time over the next year and this will probably continue into 2024. We anticipate that, while there is likely to be a cooling in price, it will be transactional activity that will be most impacted as households weather the current uncertainty.

The market should pick-up again after 2024, when most of the fallout from events of this year should have washed through, but the world is an uncertain place just now and, as ever in forecasting, we assume ‘other things being equal.’

Our forecasts suggest (on a central basis), a fall of 15% in market activity (transactions) in 2023 before gradual recovery back to trend over the following two years.

Average prices look like topping 6% in 2022 based on data to October, but reversals now seem very likely for 2023 and 2024 with continued rises in interest rates and an economic recession. Again, we are assuming a gradual return to trend as the economy recovers.

scottish transaction forecasts infographic

Your Questions Answered

  • What does the latest data on house prices show?Chevron-down

    According to the Office for National Statistics (ONS), Land Registry and Registers of Scotland, the average house price in Scotland in October 2022 was £194,874, which is the highest value on record. In Glasgow, there has been a plateauing of market values, with the average house price in October sitting at £175,675 compared to the peak of £177,173 a couple of months earlier. Edinburgh has also seen the average price flatten with values remaining around £335,000 over the preceding three months.

  • I’ve read some pretty gloomy forecasts on house prices, are these likely to be accurate?Chevron-down

    At times like these, we can always find predictions of ‘a house price crash’ or ‘market collapse’, The most scaremongering prediction we could find talked of an average house price fall of 30% in 2023. Although such forecasts tend to be highly inaccurate, it would be negligent not to highlight the many challenges facing the market at the moment. However, the current market situation should be read within context.

  • Is it more difficult to obtain a mortgage right now?Chevron-down

    The latest data from the Bank of England for mortgage approvals in November shows a fall in lending to c.45,000 approvals, down 35% on the same time last year.

  • How might all this upheaval affect first-time buyers?Chevron-down

    The rising costs of buying will likely discourage many households, particularly first-time buyers, from moving from renting to ownership at this time. A key issue in the years following the financial crisis of 2008 was the collapse in first-time buyers due to lending conditions and tightening criteria. From a peak of over 38,000 in 2006, there were only 16,220 first-time buyers entering the market by 2011. We do not see a similar collapse in activity this time, but there will be a weakening given affordability constraints and that will impact sales chains across the market.

  • In the current climate, what sort of incentives might we see being offered to entice purchasers of new build properties?Chevron-down

    In the Autumn, price discounting was starting to increase as the cost-of-living crisis emerged and mortgage rates rose. Incentives assisting with mortgages and utility bills and offering specification upgrades became more common at many Central Scotland volume developments, with these incentives typically equating to a c.2-4% discount on values. As the cost of borrowing has rapidly increased, this level of discounting has increased, rising to around 5-6% in a number of developments through a range of packages.

  • Are we facing a fall-off in house prices like that seen in the Global Financial Crisis of 2008?Chevron-down

    It’s difficult to see how the housing market can avoid the effects of an economic recession that is set to last for the next two years. However, it’s expected to be relatively shallow compared to previous recessions.