It was closer than many had expected, but in the end Scotland decided to stay united with the kingdom, rather than setting off into the future as in independent state.
In the first half of 2014, the Scottish property market had shrugged off the referendum. Dr John Boyle, Head of Research at Rettie & Co, says that the market in most parts of Scotland continued to tick away nicely; second quarter prices rose six per cent year on year, and transaction levels increased 22 per cent according to Registers of Scotland statistics. “Even though we were in the run-up to a referendum,” he says, “we were seeing an economic recovery, lending was becoming less restrictive, and the market was still continuing to function.”
The one exception was the higher end of the market, above £750,000 or so, which did stutter. That’s partly due to a higher representation of international buyers than in the market as a whole – 35-40 per cent compared to less than 25 per cent in the wider market. But, Dr. Boyle says, since the referendum this market appears to be recovering.
Scotland could have floated away… but voters had their feet on the ground.
However, immediately before the vote, buyers and sellers both seem to have got cold feet. Graham Davidson, Managing Director of Sequre Property Investment, says that, “In the run up to the vote, the housing market had virtually stalled.” Transactions were being delayed, as Better Together ran a lacklustre campaign and a ‘yes’ vote seemed ever more likely.
It’s not surprising that prime property inventory increased. Grainne Gilmore, head of research at Knight Frank, said that there was 36 per cent more property on the market at the end of June than three months before, and some deals were being negotiated with an “independence clause.”
On the other hand, as Strutt & Parker’s research points out, the approach of the vote caused a sudden flurry in the central Edinburgh market, with high demand for two to four bed properties between £150,000 and £600,000 rising as buyers aimed to take advantage of the Help to Buy scheme, which might have ceased to be available in an independent Scotland.
There were also concerns about mortgage funding in an independent Scotland. Faisal Choudhry, Associate Director of Residential Research at Savills, explains that if international financial markets deemed an independent Scotland politically and economically riskier than the UK, it could have been given a lower credit rating, which would have pushed up interest rates on Scotland’s government debt. That in turn would have pushed mortgage rates up. Since 70 per cent of transactions in Scotland require a mortgage, that would have had a highly negative effect on house prices. Currency risk was also a major concern for cross-border buyers.
Even so, Zoopla, which estimated that Scottish prices could fall £31,000 in the event of a yes vote, and eMoov’s Russell Quirke, who saw the price of independence as a 20 per cent fall in the property market, were out on their own; most participants in the market were far more sanguine.
THE IMPACT OF DEVO MAX AND MANSION TAX
However, if you think it’s all over, think again. Not only are there major changes in the market for land and property on the way in Scotland, but there’s also “Devo Max” – further devolution delivering greater powers to the Scottish Parliament – creating further uncertainty in the property market. Graham Davidson worries that it’s now difficult to see clearly. “It remains to be seen just how far devolution will go and what the impacts will be for both Scotland and England’s property investors,” he says. “There are fears that some of the wealthiest investors in Scotland could begin to look elsewhere, as there is still much uncertainty over property taxation thanks to devolved powers. The recent party conferences have also thrown up more questions, for example would Labour’s proposed mansion tax also apply to Scotland?” A further 18 months of negotiations over Devo Max are likely, so these uncertainties may not be cleared up soon.
Graham Davidson suggests an intriguingly different way of looking at Devo Max, which also has consequences for Wales and England. If English regions get extended powers, as the government’s post-referendum review of institutions suggests they might, he believes that could be very good news for major cities outside London, particularly Manchester and Liverpool.
There are also proposals to extend Right to Buy, for instance giving tenant farmers an absolute rather than pre-emptive right to purchase the land they farm. John Boyle says the government’s plans are now in a consultation period, but the prospect of changing rules could hit the estates market. There’s a huge demand for agricultural land, both pasture and arable, and prices have risen fast, he says, but “there’s a lack of inventory; very little good quality farmland is coming on to the market.”
The wider housing market will also see a big change from April 2015, when the Land and Building Transaction Tax (LBTT) will replace Stamp Duty in Scotland. According to John Boyle, it is likely to favour residential sales below £180,000, which represents roughly 70 per cent of the total market (the average price in Glasgow is £125,000), while properties above £400,000 are likely to see higher tax than is payable now. While at £400,000 the total extra taxation might only represent a few thousand pounds, perhaps one per cent of total price, this could still have a dampening effect on the prime market.
It remains to be seen how Devo Max and Mansion Tax will affect the Scottish housing market.”
A SMART RECOVERY
However, other factors suggest the Scottish market could recover smartly from the referendum blip. Forecasts from major agents are optimistic; Ran Morgan at Knight Frank Scotland expects 3 per cent capital appreciation in 2014 and 3 to 6 per cent in 2015, while Savills’ research department foresees an 18 per cent increase in prime residential prices over the next five years.
Estate agents should keep busy, as business is likely to be brisk. Faisal Choudhry expects a 10 per cent rise in transactions, noting that Q1 saw “the busiest start to the year since 2008.”
That’s partly driven by the wider economy, which is recovering well, with a diverse portfolio of industries attracting growth – life sciences and the finance sector in Edinburgh, oil and gas in Aberdeen, and digital media in Dundee. Scotland is also a big player in renewable energy. Recovery in the financial sector, and better access to lending – driven partly by UK-wide initiatives such as the Funding for Lending Scheme and Right to Buy – has also helped.
But the market has also been helped by the relatively low price of property. Savills pointed out last year that buyers recognised that the gap between house prices in London and in prime Scottish locations had never been so extreme. A house in Fulham, for instance, would achieve three times the price per square foot of a similar property in the suburbs of Edinburgh. As a result, Savills was seeing a significant increase in the number of people from England looking to buy north of the border – Faisal Choudhry says there are a number of “London supercommuters” looking for Scottish property. “Buyers from other parts of the UK are becoming a key component of the Scottish market,” he states.
At the same time, there’s been a dearth of new housebuilding, which has kept supply low. Social housing investment fell from £600m a year in the 90s to less than £150m now; the private sector is building less than half as much as at the peak of the market. John Boyle says that development is back on an upwards trend but it’s nowhere near the 35,000 level that the government needs.
Just as the English market has been driven mainly by London and the South East, the Scottish market has become polarised between the major markets of Edinburgh and Glasgow, and the provinces which have generally performed less well.
One standout exception is Aberdeen, which now enjoys average prices close to Edinburgh levels after several years of heated price appreciation, “There’s a question mark over just how sustainable that is,” John Boyle says.
Glasgow’s West End has done particularly well, according to Faisal Choudhry, with demand being driven by younger professionals, who were until recently somewhat sidelined from the market.
There’s a good range of properties in Dowanhill and Hyndland, and larger properties make Kelvinside particularly attractive to families. He expects to see good growth in the West End market over the next five years.
Current price trends seem likely to continue. John Boyle suggests that, “In terms of capital appreciation, the higher performing areas, Edinburgh and particularly prime properties will probably appreciate quickest over the next six to seven years.” East Lothian, with its good transport connections to Edinburgh and many affluent areas, should also do well. He concurs with Choudhry that the West End of Glasgow is likely to be a property hotspot for some time to come, and adds Milngavie and East Renfrewshire to the mix. East Renfrewshire, he says, is an exception to the usual east/west divide in Scotland, which sees higher prices on the eastern side – a slight twist on the English north/south split.
Scotland also has a thriving Privately Rented Sector, with more than a quarter of all Edinburgh households now renting privately, and average rents hitting a record high of £534 a month in July, 2.7 per cent up year-on-year. That’s still nearly a third lower than the average across England and Wales, though, and as the Your Move Scotland Buy to Let index shows, average gross yields at four per cent are some way lower than the England and Wales average of five per cent.
Aberdeen now enjoys average prices close to Edinburgh levels, but is that sustainable?”
However, better yields can be found. John Boyle says those looking for the best yields may have to consider secondary or tertiary areas. “The yields are highest where you aren’t going to get great price growth,” he explains, suggesting Dundee or less fashionable areas of Glasgow. “If I had to buy a property now to make a good yield, it would be a two-bed flat in Glasgow, pulling in six to seven per cent a year.” Landlords looking for even higher yields could get 10 per cent plus in Craigmillar, a poorer area of Edinburgh, where a two-bed flat can still be bought for £125,000.
Doctor Johnson famously said that, “the noblest prospect which a Scotchman ever sees, is the high road that leads him to England.” It seems he was wrong about that. Even if Devo Max and the introduction of LBTT introduce some elements of uncertainty, the prospects for the Scottish property market right now look very good indeed.