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The impact of Brexit on the Scottish Property Market
As things stand, the Brexit deadline has been extended until October 31st, with no clear progress as of yet on what terms the UK will ultimately leave the EU. As might be expected, this Brexit deadlock has made uncertainty the watchword of the day and, much like elsewhere in the UK, Scotland is seeing the effect of buyers and sellers being in the dark about what Brexit will ultimately look like.
Although house price growth was not initially much affected by the referendum result (Land Registry data showed only a 1.4% drop in growth between June and July of 2016) recent Brexit developments have begun to cause noticeable effects in the property market. Simon Rubinsohn, chief economists of the Royal Institute of Chartered Surveyors, predicts stagnation for the Scottish market.
As he told the Scotsman: ‘Brexit remains a major drag on activity in the market with anecdotal evidence pointing to potential buyers being reluctant to commit in the face of the heightened sense of uncertainty.’ Indeed, although the last year saw total sales rise by 6%, inquiries from Scottish buyers fell sharply last month, reflecting the heightened uncertainty regarding Brexit’s outcome. ‘We expect transactions to decline on this basis’ says Rubinsohn.
And the nationwide wide figures would seem to bear this out. Registers of Scotland have reported that property prices have dropped 0.2% between February of 2018 and 2019, representing the first annual drop since before the referendum.
However, as Janet Egdell, of Registers of Scotland, told the Scotsman: ‘Prices increased in around two thirds of local authority areas and different property types showed a mixed picture, indicating that the market is highly variable across the country in this time of uncertainty.’
This is indeed the case. Aberdeen conforms to the national trend of property price stagnation, but has shown a remarkable 22% increase in total sales – over three times the national average. This is believed to be led by higher-end homes and reflects a recent reversal in the fortunes of the region’s oil industry, which has famously been suffering since 2014.
Both Glasgow and Edinburgh had a good 2018, with property prices in both cities increasing by 9% to an average of £137,517 and £264,745 respectively. For comparison, this increase is significantly higher than the UK average of 3.6% (£224,502 to £232,554). Into 2019 and approaching the Brexit-slump of recent months however, both Glasgow and Edinburgh reflect the national trend, with less inquiries from buyers and predictions of transaction level decline. Again, uncertainty is the order of the day and only the coming months will tell if these predictions are accurate.
One development which has the potential to alter trends is a new Scottish Government £150m pilot scheme to give loans to first time buyers. Announced by Nicola Sturgeon on the 28th of April, the scheme is set to begin later in the year and will run until the end of parliament in 2021.
The scheme is designed to help young buyers get on the property ladder, but it is worth noting that its success in overcoming the Brexit slump is not a foregone conclusion. The scheme mirrors the Help to Buy scheme which has been in place in England and Wales since 2013, and this is a scheme which, despite a significant initial impact, has not protected against the recent sluggishness of growth south of the border (which is most noticeable in London, where house prices are at their lowest in six years).
Regarding rent, there remains the familiar challenges to the Scottish market which predate Brexit. Rents are rising a bit too quickly in Scotland’s major cities. In Edinburgh, the average rent has risen from £747 to £1062 since 2008, and Glasgow exhibits a similar relative rise (£567 to £749). These rates are not in line with average income increase and therefore could ultimately have an effect on transaction numbers.
The only major Scottish city which bucks this trend is Aberdeen, where rents have dropped off on account of the oil and gas slump. However, as they were considerably higher before, this has only had the effect of bringing them into line with the average in other cities (and, as we have noted, the slump is beginning to gradually reverse).
However, a recent investment of £30m by the Building Scotland Fund into the rental market is set to provide 1,800 properties built for private rent. This could have some effect on the rent trends which have been pretty much consistent in Scotland since the recession.
The shadow of the recession, indeed, is still a much bigger influence than Brexit has yet been and the Scottish transaction volume is still some way off the 2007 peak of 154,407.
Generally speaking, however, the effect of Brexit on the property market in Scotland is much the same as that across the whole UK – as uncertain as Brexit itself. General forecasts range from the catastrophic to the cautiously optimistic. The Governor of the Bank of England, Mark Carney, warned last year that a No Deal Brexit could send house prices tumbling by up to a third. Rubinsohn, however, told the BBC that Carney’s financial modelling ‘was undertaken for financial stability purposes’ and that ‘some of the assumptions behind the disorderly Brexit scenario seem implausible to us.’
It is even possible that, if a favourable deal can be reached, then the country might experience what Jonathan Harris, director at the mortgage brokers Anderson Harris, describes as a “Brexit Bounce”.
Carney and Harris obviously offer two very different scenarios for the ultimate effect of Brexit on the property market and it is precisely because of this uncertainty that, in the immediate short term, buyers in Scotland are beginning to hold off.
Only once a breakthrough in Brexit negotiations will we be able to make some solid forecasts for the year ahead. For now, as Harris recently told the Financial Times, ‘most people are keeping their powder dry to see what is going to happen’.