Positive outlook

The generally benign economic climate in Scotland plus the recent base rate cut should combine to ensure the housing market continues to grow, albeit at a slower rate than in recent years, says Harvey Jones

The ripples from the property boom continue to wash over the outlying corners of the UK, notably Scotland, where the property market remains lively.

The country can boast a bonny 12.5% house price inflation during the past year, more than three times the UK average of just 3.7%, according to the Bank of Scotland.

It also claims the hottest spot in the UK is the coastal town of Irvine in TStrathclyde, where prices have risen a massive 44%.

Scotland is marginally more buoyant than Wales but far behind Northern Ireland, which grew an unassailable 27% during the past 12 months.

Growth may be easing now, with prices rising only 1.4% in the three months to the end of June, but the slowdown is modest compared with elsewhere, says Tim Crawford, group economist for BoS. Property still looks cheap by UK standards.

“The Scottish housing market is the most affordable in the UK with prices one-third lower on average and more than 50% lower than Greater London,” says Crawford.

That gap is narrowing, if slowly. One year ago, the average house price in Greater London was 2.5 times higher in Scotland, now it is 2.2 times more.

During the past three years, Scottish property prices have risen a total of 62%, reflecting the strength of the local economy in which unemployment is falling and salaries are rising on the back of skills shortages.

But former hotspots Edinburgh, Glasgow and Aberdeen are looking distinctly cool as hard-pressed buyers seek greater value in outlying towns with good commuter links.

In Edinburgh, the average property costs only 2% more than a year ago, at 176,600, says Bank of Scotland. This still makes it the most expensive location in Scotland.

Within the city itself, there are even signs that prices are falling, according to the Edinburgh Solicitors Property Centre. A two-bedroom flat in Marchmont and Bruntsfield cost an average of 231,885 in the second quarter of 2004 but one year later that has fallen to 216,497 – a drop of 7%.

But activity levels remain healthy, with residential sales in Edinburgh and the Lothians up 2.6% on one year ago.

Buyers are increasingly looking beyond the city centre for affordable properties, pushing up prices in the Lothians and beyond, says ESPC chairman Robert Stimpson.

“Increases across east central Scotland reinforce the view that house buyers are recognising there is better value beyond Edinburgh,” he says. “Stirling, Dunfermline and Falkirk all recorded double digit percentage increases over the period.”

Under the Scottish conveyancing system, sellers can put their house on the market on an ‘offers over’ basis, soliciting blind bids from potential buyers. In good times, competing buyers can bid anything between 10% and 40% above the asking price. Some have blamed the system for ramping up prices during the recent boom, as buyers battled to outbid each other.

But the average premium above the asking price in Edinburgh halved to 18% during the past year, closer to historical norms and in line with the rest of east central Scotland.

“For example, premiums in Fife averaged 18% while in Stirling it was little higher at 20%,” Stimpson says.

Bill Moncrieff, director of strategy and development of the Clarkson Hill Group in Edinburgh, says the offers over system puts a lot of pressure on buyers, particularly during boom times.

“They prefer fixed price sales because they know exactly what to bid and these properties always sell much faster, keeping the market flowing.”

But sellers remain in a strong position. “Most still get the asking price. They won’t accept less and right now, why should they?” he says.

Scotland has never suffered negative equity and Moncrieff says his countrymen’s traditional thrifty attitude continues to stand them in good stead. He has spent the past few years encouraging first-time buyers to build a deposit rather than stretch themselves with a 100% mortgage, and many have been listening.

“Those who knuckled down, got their deposit and cleared their credit cards are finding it much easier to get into the market,” he says. “Those who don’t save for a deposit and ask to borrow six times their salary can go to another broker because I can’t help them.”

Glasgow, another former hotspot, has seen a slight fall of 2.6% in the past three months, according to Lloyds TSB Scotland, but it still grew 23% over the year.

Tony Marchi, managing director of local packager Capital Mortgage Connections, says the fashionable West End, desirable Milngavnie and Bearsden on the northern edges, and popular footballers’ haunts Whitecraigs and Newton Mearns in the south have all slowed.

“Until recently properties were selling in just a few days, but now there is a bit more stickiness,” he says.

Brokers are enjoying a healthy remortgage market, Marchi adds, as growing numbers of home owners raise funds to do up their existing properties rather than stretching themselves to move.

Only six months ago, buy-to-let was on a roll but now investors face a bumpier ride.

“More and more flats are being developed and this has made it a tenants’ market. Landlords have been struggling to get enough rental income to cover their mortgage,” Marchi says.

Scotland may be affordable relative to the rest of the UK, but first-time buyers still need all the help they can get.

“Many are finding it tough. Our brokers have been helping them out with products such as Northern Rock Together, while more and more parents are dipping into the spare equity on their property to gift a deposit,” he says.

And wealthier families are rethinking their inheritance planning. “I have seen many in pricey areas such as Whitecraigs and Newton Mearns selling their 1m or 2m homes, buying something for 400,000, and giving their children an early inheritance,” says Marchi. “This helps them get on the property ladder and cuts future Inheritance Tax bills.”

The Scottish Executive is targeting low-income families by investing in nearly 5,000 low-cost homes and launching its Homestake shared equity scheme, which aims to help 1,000 buyers, including first-timers, every year.

Under the plans, home buyers and housing associations can join together to buy a property, funding the balance with a Homestake grant. But first-time buyers in Scotland won’t directly benefit from chancellor Gordon Brown’s shared equity scheme.

Oil industry hub Aberdeen saw a 3.1% drop in prices in the second quarter, although they have grown 17% in the past 12 months, according to Lloyds TSB Scotland.

Bill MacDonald, proprietor of the Aberdeen Mortgage Bureau, says with the oil price above $60 a barrel there is no prospect of a slowdown in the local property market. “There is a shortage of houses with people scrambling for the same properties. An asking price of 180,000 will often attract bits of more than 210,000,” he says.

Only one thing could spark a serious price reversal. “If a magician solved the Middle East crisis, that would affect Aberdeen by stabilising the oil price, but there isn’t much chance of that happening,” MacDonald adds.

One day the oil will run out but the high oil price is pushing that date further into the future. “It gives the industry greater incentive to keep drilling for harder to access oil fields, keeping Aberdeen buoyant,” he says.

Further north in Inverness, MacDonald says cheap flights have helped fuel a boom by creating a new breed of commuter keen to swap English congestion for Scottish tranquillity.

“We see people flying to London every week then returning at the weekend for the beauty of the Highlands and the superior quality of life,” he says.

Prices in Inverness rose 25% during the past 12 months, pushing up the average property price from 118,436 to 148,251. Tony MacIver, managing director of estate agents and mortgage brokers MacIver Group, says the boom could easily last another five or six years. Local employers such as Johnson & Johnson and Scottish Water are taking on staff, and the Scottish Executive is promoting employment opportunities in the region.

The influx of workers has created a buoyant rental market. “Many are testing the water by renting for six to 12 months before taking the plunge and buying,” he says. “You won’t have any problem filling your rental property around here.”

Two-bedroom houses are renting for between 550 and 700 a month. “With prices much lower than, say, Edinburgh, investors are getting far better yields,” MacIver says.

Locals don’t find Inverness so affordable. “I see plenty of first-time buyers and local couples who simply don’t earn enough to buy a place of their own. And even if they do they get caught up in a bidding war with investors,” he says.

The boom is spreading further and further away from Inverness, reaching Drumnadrochit, near Loch Ness, and Dornoch, where Madonna held her wedding. “We get a lot of buyers from the US looking for a holiday home to enjoy the golf and Highland scenery,” says MacIver. “Nairn on the coast was a ghost town until recently but it has a lot of beautiful properties and is starting to come back as well.”

Motherwell is Scotland’s second hottest location after Irvine and ranks third in the UK, growing 41% during the past 12 months, according to BoS.

Broker Alistair Lafferty, who owns Motherwell Mortgages, says it has been a heady time. “Motherwell is sited between Edinburgh and Glasgow and buyers get much better value here,” he says. “Recent bypasses give excellent access to the motorway and there are plans for a big development on the old Ravenscraig steel plant on the outskirts of the town. If that goes through, it will bring 3,000 new houses and a retail park.”

Old industries may be dying but they are being replaced by jobs in financial services, banking and insurance, where Scotland has delivered the fastest rate of employment growth in the UK for the past 20 years, according to Bank of Scotland. It has a higher proportion of people employed in financial services than anywhere in the UK – 5% of the workforce.

“I don’t know whether Motherwell can sustain this level of growth but who knows? I have been doing well servicing existing clients but might have to brace myself for an influx of new business,” Lafferty says.

His optimism is reflected across Scotland, where half of all home owners expect their property to increase in value during the next year, according to Clydesdale Bank.

But buyers are more cautious, with only 14% prepared to offer more than 10% above the asking price, half the number compared with 12 months ago. One in five would like the trend toward fixed price property sales to become the norm, fearing they might pay over the odds in a slowing market.

English lenders and brokers looking to do business in Scotland must do their homework, says Kevin Friend, director of sales at Glasgow-based packager Opus. Most still approach Scotland as if it was a region of England and forget it has a separate conveyancing system.

“They think they can put a representative on the road from Newcastle and everything will be fine, but that isn’t the case,” he says.

In May, Opus set up a remote processing centre for sub-prime business with GMAC-RFC. “We can process GMAC-RFC’s business in Scotland so it no longer has to send cases to Bracknell in England. We are now looking at apply the same business model to other lenders, including Rooftop Mortgages,” he says.

Opus is looking to help lenders who don’t have representation in Scotland. “We wrap our service in the flag and understand the demands of the Scottish legal system,” Friend says.

Applications have to be processed much faster than in England because offers, once accepted, are binding, with penalties for buyers who miss their entry date.

“This is a challenge in the sub-prime market where lenders typically ask more probing questions of applicants, but we have taken a case from approval to completion in seven days,” he says.

The Mortgage Intermediary Alliance of Scotland has taken time to get revved up but co-director Colin Macullum says it is now ready for take-off.

“We started by charging a subscription but that didn’t wash,” he says. “It’s now free to become a member. MIAS aims to support directly-authorised intermediaries and has almost 300 members.”

He is also looking to expand the Mortgage Club. “After Mortgage Day, one or two lenders were wary of getting close to mortgage clubs but that has changed. They have lost their neuroses and are ready to get on board.”

MIAS won’t tread on the toes of the Association of Mortgage Intermediaries, which is recruiting members north of the border. “We are fully behind AMI and have a good relationship with it. We are a commercial organisation, they are a trade body,” Macullum says.

Scotland is a good market to be doing mortgage business in now and that looks likely to continue, says Professor Donald MacRae, chief economist at Lloyds TSB Scotland.

“The economic environment for the Scottish housing market remains benign with the lowest claimant unemployment for 30 years, robust levels of retail sales and continuing high levels of consumer confidence.

He adds that house prices cannot continue indefinitely rising at a rate faster than the increase in earnings, but he believes a slowdown in the rate of increase is unlikely this year.

And the recent cut in interest rates and continuing shortage of supply will only help keep things bubbling along.

Massive price variation between regions
John Rattigan is director of compliance at Cartel
Massive regional variations in house prices can be seen between house prices across the Scottish regions, with Edinburgh having the highest average price and the Shetland Isles the lowest.

One contributory factor to rising house prices in Scotland has been the rise in house prices in England. This has led to a trend towards individuals using increased equity in a residential property to finance second home purchases in Scotland. This pushes local would-be buyers off the bottom rung of the housing ladder. Due to the rise in Scottish house prices, the country has seen a drop in rental yields that could affect some in the buy-to-let market. Recent data also shows an increase in parents buying property for their children to reside in while at university – a trend that is contributing to market buoyancy in university towns and cities.

As with England and Wales, Scotland has a lack of affordable housing. The Scottish Executive is planning to invest up to 1.2bn to achieve its target to provide 21,500 affordable homes by 2008. The executive also plans to expand the low cost home ownership programme by 80% to help first-time buyers and others aspiring to own a home.

The Royal Institution of Chartered Surveyors’ housing market survey finds that house prices in Scotland rose in July for the first time in a year but locals still see the property market as subdued, with many houses lingering on the market despite repricing. But demand for family homes in and around urban centres is still buoyant and although the market may be slow, there is in reality only one Scottish region that has seen negative growth in house prices during the past year.

Values rose by more than 20% in the past year
Mehrdad Yousefi is head of intermediary mortgages at Alliance & Leicester
Last year was a busy one for the Scottish property market, with average values increasing by more than 20% – a higher rise than that recorded in either England or Wales.

Historically, the Scottish market is less volatile than the hotspots of England and there is a general optimism the market will remain bullish for the next few years.

As in England, property prices vary greatly from one area to another, from an average price of just over 65,000 for a property in Shetland to more than 170,000 in Edinburgh.

Cities have seen the highest price increases by far, especially Edinburgh. This was perhaps to be expected with the unveiling of such attractions as a Scottish national parliament and the emergence of a distinct national identity. As a result, first-time buyers have found it increasingly difficult to step onto the property ladder – a phenomenon that has never been seen before in Scotland.

There has been some increase in new build properties but there is still a gap between supply and demand. This should help maintain price levels. Our business development manager in Edinburgh says the cautious nature of the Scots as a whole – whereby property is seen as a home rather than an investment – means that on average Scots experience far fewer home moves than people south of the border.

So far in 2005 the number of property sales has declined as a result of a slowing economy. A recent report by the the Royal Institution of Chartered Surveyors states that although sales are significantly lower than the same period in 2004 prices are continuing to rise, albeit at a slower rate.

Robin Steele, our business development manager in Glasgow says there has been a marked increase in the number of properties being sold at a ‘fixed price’ recently and that this must be good news for first-time buyers and those with a minimum deposit.

With the recent reduction in interest rates and a much wider choice of properties, more Scottish first-time buyers will be encouraged to get into the housing market – a market that clearly needs them as much as they need homes.

Future looks good for the Scottish market
Judith White is national sales manager at First National
During the past three years the Scottish housing market has experienced a boom, with house prices increasing by 62%.

Traditionally, Scotland has struggled to compete with other parts of the UK property market, but times have changed and in recent years Scotland has repeatedly outperformed the rest of the country with annual house price growth of 12.5% compared with 3.7% in England and Wales. While the beginning of 2005 saw a slowing of the market in Scotland, partially due to the immediate impact of Mortgage Day, the decrease was more modest than elsewhere in the UK.

A key factor behind the growth of the Scottish housing market is affordability. Despite the recent boom, housing prices are still around a third lower than in the rest of the UK. Latest figures show the average price of a Scottish property is 107,294 compared with the UK average of 162,850.

Although Scotland is considered to be the most buyer-friendly region in the UK, many aspiring first-time buyers are still finding it difficult to get on the property ladder.

But plans to create more affordable housing, combined with the recent base rate cut and the settling housing market, should help fuel the first-time buyer market.

As in the rest of the country, Scotland has seen specific areas grow in popularity. A recent report shows that this year Dundee has experienced prices rises of 27% but Edinburgh is the jewel in the crown, where property is in constant demand despite it being the most expensive location in Scotland.

The future for the Scottish housing market looks good. Despite little movement at the moment, the Scottish economy is settling at a sustainable level after the boom period.

Low unemployment levels, healthy retail sales and high consumer confidence should continue to drive steady housing market growth in Scotland.