Prime property market outlook in Scotland positive post Brexit
The prime property market in Scotland is performing better than predicted after the EU referendum with more buyer activity, according to the latest analysis report.
Up until the end of June 2016, prime sales at £400,000 and above across Scotland reached 3,012, down 19% year on year but this was largely due to record transactions taking place in the first three months of 2015 ahead of the introduction of higher LBTT property taxation rates.
In comparison with the previous 12 month period ending June 2014, the overall Scottish market in terms of transactions increased by 10%. However, the number of prime sales increased by only 1% since the year ending June 2014, showing the effect of higher rates of taxation on sales above £400,000 across Scotland.
However, the report from real estate firm Savills shows that although prime activity between £400,000 and £600,000 has improved in most central hubs, country locations are less active. For example, the prime market in the Aberdeen area continues to be impacted by the slowdown in the energy sector, with the lowest level of prime transactions recorded in five years.
It also suggests that the local oversupplied mainstream market, where the level of stock has increased by 85% in a year, is impacting prime market sales and these have fallen by 37% in two years.
And across Scotland, the market between £600,000 and £1 million is struggling to adjust to LBTT, with 11% fewer sales compared to two years ago. Meanwhile, the market between £800,000 and £1 million in Edinburgh remains challenging.
In Edinburgh, the majority of prime activity took place in the core central locations of New Town, Grange, Morningside and Merchiston. However, prime activity in the West End, Stockbridge, Murrayfield, Trinity and Colinton exceeded the level during the year ending June 2014.
Faisal Choudhry, head of Scotland residential research at Savills pointed out that Edinburgh’s prime market strength has fuelled surrounding areas such as the Borders, which has led the way with prime activity 25% higher than the five year average.
Prime sales in Glasgow’s West End are 19% higher than the five year average, whilst in Lanarkshire, prime sales are 22% higher, led by the hotspots of Bothwell and Thorntonhall. Helensburgh has witnessed the highest number of prime sales for five years due to more certainty surrounding the future of Faslane.
‘Looking ahead, high levels of activity, in terms of new buyer registrations and viewings is likely to underpin future prime sales activity in the medium term,’ Choudhry said, adding that while it is relatively early days since the referendum, and question marks remain with regard to the speed, terms and conditions of the UK’s exit from Europe, a picture is beginning to emerge, which reveals the Scottish housing market to be resilient and in good shape in the short to medium term.
Indeed, the number of residential sales at £1 million and above reached 146 during the year ending June 2016, which is in line with the five year average, with more than half of these sales occurring in Edinburgh.
‘The capital is benefitting from the fact that in times of uncertainty, high net worth investors are drawn to prime central hotspots, which are considered safe investments,’ Choudhry pointed out.
Aberdeen has witnessed a reduction in million pound activity from a five year average of 22 to only 13 sales in the latest 12 month period. Greater Glasgow has regained its second place with 19 such sales taking place. This was supported by 10 in the city itself, the highest number since 2008.
East Lothian has continued its strong performance with 10 sales, closely followed by Fife where there were nine sales, all of which took place in and around St Andrews. Interestingly, despite the slow adjustment of the market from £600,000 to £1 million, sales above £1 million are coping with the higher rates of LBTT, the report points out.
‘Looking ahead, we expect this market to remain stable, with around 140 to 150 annual sales taking place, as this market is better able to absorb higher rates of LBTT,’ Choudhry added.
There was robust growth in the market below £400,000 despite the slowdown in the Aberdeen area market. There was a 9% annual increase in the number of Scottish residential transactions during the year ending June 2016. Furthermore, the average price in Scotland increased annually by 5% in June 2016.
The report also shows that market growth is continuing to spread out to locations that were lagging following the housing market downturn. These include East Ayrshire, North Ayrshire and Dundee, where the annual growth in transactions was higher than the figure for Scotland as a whole.
‘This is mainly due to an increase in house building, coupled with attainable house prices and improving transport links. Annual transactional growth in traditional hotspots and commuter locations, such as Midlothian, South Ayrshire and Renfrewshire, as well as the market hubs of Edinburgh and Glasgow, also exceeded the figure for Scotland as a whole,’ Choudhry explained.
He also pointed out that mortgage lending plays a fundamental role in the Scottish housing market, with typically around two thirds of transactions dependent on loans for house purchasing. The number of mortgages across Scotland for house purchasing increased by 7% during the year ending June 2016. The average mortgage rate for house purchases and remortgages across the UK during June 2016 was 2.5%, compared to almost 6% during the peak of the market in 2007. However, the best mortgage rates are restricted to those with high levels of equity.
‘Looking ahead, much depends on what happens to base rates and mortgage lender margins. Whilst the Bank of England base rate has fallen, there is a risk that the cost of mortgages may rise further down the line, as banks seek to protect their margins. Overall, that could put a squeeze on affordability at the point of purchase but not a rapid tightening across a wider cross section of mortgaged homeowners,’ said Choudhry.
‘The potential for mortgage lenders to tighten their criteria presents a longer term risk to market activity below £400,000 across Scotland. This could mean that transactions, which reached a post credit crunch high of almost 101,000 over the past year, could fall back slightly. Fundamentally, the market below £400,000 in Scotland will be underpinned by a continued environment of low interest and taxation rates and low supply,’ he added.
He believes that low rates of mortgages and taxation will underpin the market below £400,000. ‘However, this market is heavily reliant on lending, and a tightening in criteria could impact on the number of sales and prices in the long term. An expected adjustment in values in the Aberdeen area could improve transactions and reduce the record amount of available stock, which is hampering sales across the market,’ he explained.
He also believes that the number of prime transactions and values up to £600,000 will continue to improve in Scotland’s city and town locations. ‘However, the market up to £1 million, especially in country and rural locations, will not recover to levels witnessed up until 2014, unless the punitive 10% level of LBTT between £325,000 and £750,000 is reduced,’ he said.
And Choudhry predicts that activity above £1 million will remain stable as this market is better able to absorb higher rates of LBTT. ‘Edinburgh will continue to dominate this market due to the fact that in times of uncertainty, high net worth investors are drawn to prime central hotspots, which are considered safe investments,’ he said.
‘We are encouraged by the high levels of activity in terms of new buyer registrations and viewings since the EU referendum. With a backdrop of improving economic indicators, the fundamentals for a healthy residential property market are in place and there will continue to be a stable market due to the essential requirements to move house, together with the needs of upsizers and downsizers,’ he concluded.