Since last year, two competing forces have kept house prices in Scotland pretty much stable. Lack of mortgage funding and job worries have suppressed demand. Forbearance by banks and the natural caution of would-be movers in a recession have limited supply.
Right now, it doesn’t look as if the balance of power is going to change soon. But new data released last week suggests that, under the surface, things could be changing. You won’t see the impact of this immediately, but when the market does improve, the change could be more marked and more rapid than you might expect.
Property more affordable
Property, especially inScotland, is becoming increasingly affordable. The Bank of Scotland calculates that mortgage payments for a new borrower in Scotlandare at their lowest as a proportion of disposable earnings for ten years. Typical mortgage payments for Scots now represent close to 20% of disposable earnings, compared to the long-term average of 30% of disposable income.
That’s the result of a fall in prices of around 12% from their peak in 2007 and a very sharp decline in interest rates. Moreover, it looks like interest rates are set to remain low for an extended period.
That should help to sustain demand.
Lower mortgage lending
On the other hand, mortgage lending remains weak. Data on lending from the Bank of England released on 30th August shows that mortgage approvals in July reached 47,000. While that is up on June, it is below the 49,000 recorded for the same month last year. It’s the second month in a row to see mortgage approvals lower than the same time last year. You can see the full series of mortgage approvals data going back to 2008 here.
That should tend to suppress demand.
On the supply side, bank forbearance and improved mortgage affordability have limited the number of forced sales, restricting the number of homes coming on to the market. The Council of Mortgage lenders says that repossessions and the number of mortgages in arrears are both lower than they were last year.
Equally, homeowners with no pressing need to sell have been cautious about putting their home on the market. In fact, property will sell and what you lose on the roundabout of a lower selling price, you should gain in the swing of lower purchase prices. But everyone is understandably cautious about taking on new obligations in uncertain economic times.
Neither of those factors seem likely to change in the near future and both tend to limit supply.
No change – all change
Right now, it seems unlikely that there will be any significant change in property values or transaction numbers, but the underlying improvement in affordability is important in the longer term.
Recoveries in the property market are generally preceded by a marked improvement in affordability. The recent improvement in affordability is not enough in itself to trigger an improvement in the market. But there can be no recovery without it. Moreover, it means that, when other barriers to recovery weaken (notably mortgage lending), conditions in the property market could change faster than you might expect.