RECOVERY in the Scottish housing market will neither be quick nor dramatic. In my view, we are unlikely to see the numbers of house sales and purchases in Scotland return to the levels of 2007 bubble for a very long time.
But the market will recover, although when it does, it is more likely to return to the levels of the mid to late 90s, when housing market activity was approximately half the levels of the boom days of 2007. This may be no bad thing, as it will reintr
oduce stability and boost confidence when it comes to buying and selling property.
It is little wonder that the Scottish housing market is showing signs of retreat, with the Scottish economy firmly in recession and GDP forecast to fall 2.6%. As consumer confidence has fallen, claimant unemployment has risen. Yet it is not all bad news. Scottish consumers are still spending, with retail sales increasing at an annual rate of 8.2% in April this year.
The latest quarterly house price data though brought little joy, showing both a price fall of 4.3% and a continuing slide in the number of sales and purchases. Yet a deeper look into the figures points to a slight recovery in the month of April alone. In this month prices performed slightly better than in the previous two. This could be part of the normal spring effect or it could be the forerunner of a recovery in the Scottish housing market. Only time will tell.
There are other encouraging signs. The number of mortgage products on the market has started to increase, as has the average loan-to-value ratio that lenders offer, meaning that deposits can be smaller than they were one year ago.
At the same time, mortgage affordability for many mortgage payers in Scotland has reached astonishingly low levels to the point that many are overpaying on their mortgage and paying back capital at a faster rate than they need to.
Affordability has improved with the average house price to earnings ratio in Scotland falling from a peak of 6.6 at the end of 2007 to 5.9 at the end of last year. At the same time, the loan to income ratio of average mortgage loan to average earnings supporting that mortgage has moved downwards from 2.9 to 2.7.
But there is no doubting that the market and homebuyers have faced some difficult challenges for many months now.
The first impact of the credit crunch on the Scottish housing market was a swift cutback in the number of mortgages available to potential house purchasers and a sudden increase in the size of deposit required by first-time buyers.
This resulted in a sharp and immediate drop in housing transactions, with the number of residential sales in Scotland in the first three months of 2008 falling by 19% compared with the same period in 2007. That fall accelerated until in 2009 residential sales in the same three months were down by 57% on 2008.
Prices took a little longer to respond, with the first quarterly fall of 1.3% evident in quarter four of 2007. However, average Scottish house prices have now fallen for three successive quarters to reach £148,990 at the end of April this year. This is an annual fall of 8.8% comparing this latest quarter with the end of April to the same quarter one year ago. The sales of flats have been most affected, with the number of flat sales in the House Price Monitor falling by 39% comparing the quarter to end of April this year with the same quarter one year ago. Semi-detached sales fell 28% in the same period.
Yet a house should be considered a home first and an investment second. Disappointing though a fall in the value of your home may be, if you don't want to move, it doesn't affect you. Hopefully, by the time you do, the market will have improved.
As the Scottish population increases, and lives longer, there are fewer people living in each house. This means total households are forecast to grow in Scotland for the next decade. At the same time, people will continue to want to invest in their homes. Therefore, the demand for housing will continue, with potential for owner occupation to move past 70% in Scotland.
Donald JR MacRae, is Strategy & Finance Director at Lloyds TSB Scotland The full article contains 753 words and appears in Scotland On Sunday newspaper.
