Would Independence Affect Scottish House Prices?
How is the housing market in Scotland reacting to the increasing immanence of the independence referendum and how would Scotland leaving the Union affect Scottish house prices?
In just over two months time, on 18 September, the historic referendum on whether to remain part of the United Kingdom will take place in Scotland. As the date for the referendum looms ever larger, more and more focus is being placed on the upcoming vote and the potential consequences that will arise, particularly if Scotland decides to secede from the Union that has existed since 1707. As such, National Homebuyers, UK property buyers, have composed the following article in order to assess the effect independence would have on Scottish house prices.
The first point that needs to be made on the subject is that virtually all assumptions made in relation to any of the eventual outcomes of Scottish Independence are purely conjectural. Secession is something that does not occur very often in international politics and, even when it does, there are not really any set procedures or universal guidelines stipulated in international law that cover such an eventuality.
There are few recent examples by which the situation can be judged. The nearest historical precedent is that of Czechoslovakia, which split into the two separate nations of Slovakia and the Czech Republic in 1993. However, as with any similar situation, the dissolution of Czechoslovakia was an extremely idiosyncratic case, as would be any possible secession of the Scotland from the United Kingdom.
To put things basically, it is the prerogative of each individual nation considering dissolution to define the particulars and parameters of the secession process and everything it entails.
What is more, the prediction of future economic trends is also notoriously far from being an exact science. As John Kenneth Galbraith famously and colourfully put it: “The only function of economic forecasting is to make astrology look respectable.”
However, predictions and forecasts are just that and they can be extremely useful so long as one bears in mind that they are, essentially, opinions. Here is ours.
Scottish House Prices – The Story So Far
Amid concerns and questions surrounding the future of the pound, the separation of the UK financial systems into two distinct entities, the division of debts and assets and several other economic factors, house prices in the UK, and particularly in Scotland, seems to be just another unanswerable question. However, as with many things, the best place to start is the beginning: the story so far.
Following the almost ubiquitous story that defined the housing market in the UK following the most recent economic crash, house prices went into free fall in 2008, descending rapidly from the peak levels they reached the previous year. It should be noted however, that this downturn in prices was not as marked or as drastic as in other parts of the UK. Again, in common with the rest of Britain, house prices then entered a prolonged period of stagnation. Then in the second half of 2012 average house prices in Scotland fell for six months in a row, before bucking the trend in January 2013. Despite anecdotal exceptions, prices continued to depreciate until the middle of 2013. Since then, Scottish house prices have been steadily increasing and, according to the latest statistics released by the Office for National Statistics, house prices in Scotland rose by 3.9% between May 2013 and May 2014. Echoing another nationwide story, perpetually rising house prices in Scotland are, in large part, being driven by the lack of supply in relation to demand for housing stock.
Scottish House Prices in the Run Up to the Referendum
Up until recently the entire independence debate seemed to be having little or no effect whatsoever on the housing market in Scotland. Over the past few months a number of intermittent, often high profile warnings, such as the near unanimous conclusion by Savills’ Scottish Property Outlook Conference in March, in which 90% of the economic experts involved advised Scots that, for the good of the economy in general, and the housing market in particular, they should vote No in September. Despite many such warnings that economic Armageddon would be invited by a Yes vote, Scottish house prices have continued to rise unabated and market confidence appeared unperturbed.
Scottish house prices have risen for the past nine months in a row according to the LSL Scotland House Price Index, with inflation rising to 4.3% in May when compared to the same month last year. The ONS sets this statistic at the slightly more conservative figure of 3.9%, but both reports concur that prices are continuing on an upward trend across the majority of Scotland, representing the longest period of sustained house price increase since 2007.
Richard Sexton, director of e.surv chartered surveyors, one of LSL Property Services’ constituent parts, said:
“The only fly in the ointment is a decline in total house sales, dropping 3% from April to May 2014. This goes against the historic seasonal trend for this time of year, suggesting that tighter regulations under the Mortgage Market Review have temporarily slowed housing transactions. But with recurrent indications that interest rates will rise before the year is out, new record property prices being set, and only three months to go before the Independence referendum, potential buyers may also be taking heed of caution and delaying purchase decisions until they can be clear what the future holds.”
This is representative of many areas of the rest of the UK. The recent reports by LSL and the ONS which, while generally considered to be among the most reliable sources of information on the housing market, focus on figures that are slightly behind the most recently available statistics, such as Halifax’s recently released monthly house price index, which showed that national average prices dropped by 0.6% in June compared to the levels they achieved May.
Tentative suggestions have been voiced recently which presage an impending cooling of the market. Some say this is due to the new Mortgage Market Review criteria introduced by the Bank of England in April, others claim it is a reaction to the increasing surety that interest rates will rise this year, while yet others believe it is a symptom of the market attaining a natural equilibrium following a long period of sustained price appreciation, which itself came on the back of a market crash and an extended era of stagnation.
However, in Scotland, there are those that believe the market is beginning to slow, or is at least about to do so, in the face of incremental feelings of uncertainty in regards the potential ramifications of the upcoming referendum.
High end estate agents commented last week on a tangible reduction in the number of house buyers looking to buy high value property in the run up to the vote in September. High earning Scots, English buyers looking to move north of the border and ex-pat Scots looking to return to their homeland after making their fortune abroad, are all postponing the decision to buy homes in Scotland until after the referendum as a result of fears they may subsequently have to relocate or see a drastic drop in their new home’s value.
A partner at Strutt & Parker, Robert McCulloch, believes that:
“For buyers in this sector, a vote for independence could mean the relocation of their job or a possible reduction in value of their property. Therefore, it is not surprising that a significant proportion have told us that they are awaiting the outcome of the vote before committing.”
In addition, even the LSL statistics show that the number of people selling a home across Scotland reduced by 3% in May compared to the same month last year. Again, while many commentators claim this represents a slowing of the market due to growing apprehension over the potential economic fallout from Scottish independence, some claim it is strong evidence that Scotland needs to secede from the UK because measures introduced to combat the possibility of a Londoncentric housing bubble are simply inappropriate and extraneous when applied to the Scottish market, where the approximate level of 4% growth appears sustainable.
Liz Cameron, Chief Executive of the Scottish Chamber of Commerce, supports the latter view:
“Further statistics continue to show the cross-border asymmetry in housing prices, with house price annual inflation at 11.0% in England compared to Scotland’s much lower rate of 3.6%,”
Meanwhile others point out that it is simply an indicator of a general trend in Scotland, where the volume of people looking to sell a house has decreased by over 40% in the past decade, according to the Registers of Scotland statistics.
These points of view often seem to be more contingent on which side of the political debate people are sitting than on their views on the actual housing market itself, a thematic occurrence that appears to be becoming more common in Scotland as the vote draws nearer. This is a major problem for anyone wishing to gain a true and unbiased picture of the Scottish housing market. The problem becomes even more pronounced when one attempts to predict the future of Scottish house prices following the outcome of the independence vote.
Scottish House Prices and the Independence Effect
The future of the housing market is notoriously difficult to predict under any circumstances. In the lead up to a historic and politically seminal event such as the referendum on Scottish independence, the unpredictability of the market is profoundly magnified.
The pro-independence camp are quick to assert that secession from the Union would have little or no influence on the apparently stable level of growth in Scottish house prices. Some Yes campaigners further state that any effect that did arise would be nothing but positive. Those in favour of leaving the Union claim that, by seceding, Scotland would gain more control over rates of property taxation, the resultant freedom to set these rates to suit the Scottish market, the ability to boost capital expenditure for new housing and more opportunity to incentivise property development in order to bring supply in line with demand.
The anti-independence group are just as quick to point out that the level of uncertainty many claim is currently being experienced in the lead up to the referendum would be dwarfed in the face of the massive uncertainty that would define the years following dissolution of the Union, as the myriad details of such a separation were negotiated. No vote campaigners claim this would have an extremely negative effect on financial markets and severely dent investor, developer and consumer confidence as all of these groups would find themselves unable to financially plan for the future.
As with virtually any political debate, the truth probably lies somewhere between the dichotomous opinions of both respective groups.
UBS Wealth Management’s financial expert Bill O’Neill believes that a Yes vote would usher in a period of extreme market volatility during the political machinations that must inevitably follow. However Kathleen Brooks, research director at Forex.com, insists that the respective governments of the newly separated nations would work quickly in order to reduce the ramifications of such a situation and hence reduce market volatility.
The truth of the matter is that a Yes vote would inevitably have an adverse effect on the financial markets in the immediate aftermath of a Yes vote for Scottish independence. How volatile the situation became would be entirely dependent on how long the subsequent period of uncertainty lasted. If the politicians get their act together quickly, there is a good chance the situation could be quickly contained and rectified. The problem is that the SNP have earmarked 24 March 2016 as the intended date on which separation would be affected, meaning that the uncertainty, and consequent equity market volatility, would likely continue for at least 18 months.
One of the biggest uncertainties that surrounds the debate is the future of Scottish currency. As yet there has been no firm confirmation of what monetary unit an independent Scotland would employ: the pound, the euro or a new currency exclusive to Scotland. Let us consider these scenarios individually.
Despite a number of claims to the contrary, were an independent Scotland to retain sterling as their national currency, the fact is that as a new and relatively small nation on the outskirts of Europe, Scotland be given a lower credit rating than the rest of the UK. This would result in higher funding costs which would most probably then be passed on to consumers. There is a good chance that the potential perceived increase in financial risk would result in higher mortgage rates that would place upward pressure on households and consequently drive down house prices as people would be forced to seek more affordable homes. In these circumstances there is a good chance that growth in the market would be choked off as transactions stalled due to the unwillingness of those selling property to accept lower values for their homes.
In relation to the second of these monetary options – the euro – it should be noted that is not an option in the short term, or most probably even the medium term, because Scotland would not be able to meet the stringent criteria by which nations looking to adopt the shared currency are judged.
The third option – a separate Scottish currency – presents a completely different set of questions which make it hard to predict future events in the housing market. Much would depend on the strength of any currency introduced by an independent Scotland. A strong currency would most likely have the effect of deterring foreign investors from entering the market, meaning any upward pressure on house prices would come from internal factors within the new nation. A lot would also depend on several factors that influenced the strength of the currency which, again, are hard to predict. However, if the independent Scottish currency remained weak, this could encourage high levels of investment from foreign house buyers looking to achieve good value for their money, a phenomenon which often drives prices up.
Echoing many analysts that fear heavy house price depreciation should Scotland vote to leave the UK, online estate agents e.Moov recently predicted that Scottish house prices would drop by as much as 20% should a Yes vote be registered in September.
However, respected estate agents and property market consultants Savills have recently claimed that house prices in Scotland are likely to rise no matter what the outcome of the referendum. In a presentation last month, Savill’s claimed that the difference would be found in the level of appreciation. They predicted a Scottish house price inflation rate of 25.2% in the four years up to 2018 in the event of a No vote, and 10.9% should Scotland vote for secession. Again, the Scottish government claims that such predictions would be rendered irrelevant by the increased powers an independent Scotland would gain that would allow them to manipulate and support the housing market.
Though it may seem something of a cop out, as we reach the conclusion of this article we are irresistibly drawn back to the point at which we began: uncertainty.
Not only is there a massive lack of precedent in terms of modern day dissolution of advanced commixtured European nations, there is a distinct lack of clarity surrounding so many of the political and financial details surrounding dissolution that it is practically impossible to predict future events with anything approaching a reliable level of certainty.
While many of his opponents have claimed that this lack of detail is an indication of the weakness of Alex Salmond’s campaign, the truth is that nobody knows the details, because they are yet to be worked out and, furthermore, cannot be worked out until the event of a Yes vote arises.
The irony is that their inability to produce hard and fast details and facts about the consequences of secession from the UK may well be the reason that the SNP fail to achieve such an outcome.
In these circumstances holding back and waiting to see what happens, as investors and potential buyers of high end properties appear to be doing at present, seems the only sensible option.
Either way, in the coming weeks more and more focus will be placed on Scotland as they get ready to make up their minds. Hopefully, once they have done so, the markets can make up theirs.
If you are unwilling or, for whatever reason, unable to wait on the outcome of the referendum in September and wish to sell your home in Scotland before then, the UK’s largest and most highly reputed fast house buying company, National Homebuyers, can help. We buy any house across the entirety of the UK and we are always looking to buy houses in Scotland.
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