Scotland has a population of just over five million people and accounts for 7 per cent of the UK mortgage market. However, despite the fact that the Scottish housing market is relatively small compared to England and Wales, it is still growing at a faster rate than other parts of the UK.
Over the past five years, house prices in Scotland have risen by 91 per cent, with only Northern Ireland experiencing faster growth in average costs for home purchases. The annual rate of house price inflation in Scotland stood at 14.5 per cent in October, almost double the UK average of 8 per cent, according to the Quarterly Scottish House Price Index from Bank of Scotland. We are forecasting growth of 10 per cent for the whole of 2006 in Scotland, compared to 5 per cent for the UK.
Narrowing the gap
The gap between house prices in Scotland and the rest of the UK has been narrowing over the past three years, with Greater London prices now 2.2 times higher than those in Scotland, compared with almost three times higher at the end of 2002. Price rises in the last 10 years have been very creditable North of the border, and the level of house price inflation is good news for homeowners.
However, while this is good news for those people who already own a home, Scotland’s rising prices could be a big concern for both first-time buyers (FTBs) and those on a lower income who may struggle to join the market. A silver lining for those attempting to take their first step onto the property ladder in the area is that, irrespective of recent price rises, Scotland remains the most affordable place in the UK to buy a home. In fact, seven of the 10 most affordable towns in the UK are located in Scotland, with the average price of purchasing a house currently just £122,511 – 32 per cent lower than the UK average of £179,425. This low average house price compared to other parts of Britain, has been a key factor in the rise in the number of loans to FTBs in Scotland, from 31,500 in 2004, to 34,500 in 2005. FTBs in Scotland are also borrowing in larger amounts of money on their mortgage than in previous years, rising from two times income in 1995 to almost 2.7 times income this year.
Another reason for Scotland’s strength in the housing market is that there are now more new build properties each year per 1,000 of the population than anywhere else in Britain. This means a total housing stock of just over 2.4 million, despite the fact that population growth in the rest of the UK has been stronger than that seen North of the border.
Many experts have been surprised by the rapid growth of the buy-to-let market this year – the sector has been extremely resilient considering the increases in interest rates and utility bills. The fact that house prices in the country are growing, but are still lower than other parts of the UK, means that investors are paying less to secure a property. This makes Scotland perhaps a more attractive market to enter into, compared with the rest of the UK.
Although we are not seeing a house-buying boom at the moment, there has certainly been an encouraging level of activity in the housing market as a whole throughout this year. The lower house prices in Scotland mean that the average loan size provided by lenders is less than in the rest of the UK, but with prices continuing to rise this difference in loan value is narrowing, and is expected to continue into 2007.
At the opposite end of the scale to these smaller loans is the high net worth market. Recent research has indicated that there are more millionaires in Edinburgh than any other part of the UK, with Aberdeen a close second, and Hampstead in London coming in third. Scotland may not have a growing population, but rising income levels mean that requirements for high net worth mortgages have increased significantly in recent years.
Looking ahead
Looking ahead, a key change to the Scottish market in the next few years will be the introduction of the Purchasers Information Pack (PIP). These will contain much the same information as English Home Information Pack (HIP), with sellers of residential properties being required to compile a pack providing specific documents and information for prospective purchasers. At the moment, in Scotland, the purchaser receives information about the property they are buying following acceptance of their offer. This can lead to delays in transactions going ahead while information is assembled and often means that problems only arise after significant costs have been paid.
It is planned that the PIPs will also contain a single survey, which means that because of the differences in the way homes are bought and sold in Scotland, buyers will be spared the expense of having to pay for surveys each time they bid for a property. This is good news for the Scottish homebuyer, as it is estimated that they collectively spend £7 million a year on surveys for properties that are eventually sold to other people. However, one concern is that the extra expense, usually taken on by sellers, will be added on to the cost of the property.
Potential upset to the Scottish market could occur in the early days of the information packs, with sellers deciding to put their property on the market directly before they are introduced, leading to an oversupply of properties in the short-term. This will certainly be an interesting time and we will be watching the market carefully.
An encouraging time
It is an encouraging time for the mortgage market in Scotland and with the continued growth and development of the economy as a whole, led by major cities such as Edinburgh, it is exciting to see how this prosperity will continue to affect the market. In the meantime, lenders must continue to review their portfolios to ensure their products are meeting the changing needs of the consumer and broker and make sure the market remains innovative and competitive.
It will be interesting to see how things develop next year. If you have an opinion on the market at present, or thoughts for the future, why not post it on our blog at www.bankofscotland.co.uk/intermediary (click on Charles’ Blog). This will give you an opportunity to see what other experts have to say on the matter and will allow you to join the debate.
