The Scottish Property Market Remains Resilient Despite Economic Uncertainty

Even amid economic uncertainties and interest rate rises, Scotland’s property market continues to demonstrate resilience. Rettie & Co. predicts sales transactions could drop 15%, while average house prices could see a five percent decrease.

Edinburgh buyers continue to show great enthusiasm for purchasing properties, typically achieving 104.5% of their Home Report valuation at sale time.

1. Economic uncertainty

With three Prime Ministers within six weeks and the largest interest rate rise for several years, property market confidence has certainly taken a severe blow. First-time buyers in particular are now facing difficulty accessing mortgage products or finding that rates have significantly increased, something that only compounds with each new Prime Minister they face.

As sales transactions decrease due to rising interest rates, prices in key markets such as Edinburgh have shown resilience. Family houses continue to draw strong buyer interest, with demand peaking at PS1.5 million for family houses, while flats remain less appealing given rising borrowing costs and renovation costs required to bring older properties up to energy efficiency standards.

Rhynd, Forgandenny, and Strathtay—areas within easy access of Perthshire’s private schools as well as those seeking scenic views—have seen prices supported by limited supply; this may come under threat as more stock hits the market in coming months and buyers become warier of purchasing properties that require costly renovation works.

Overall, Rettie & Co. forecasts that property markets will experience further slowing due to rising interest rates. Rettie estimates sales transactions could decrease by 15 percent by 2023, while average house prices could see their prices slip back approximately five percent.

2. Interest rates

Even with the recent interest rate rise to 4% from the Bank of England, mortgage rates in Scotland remain relatively low, giving homeowners confidence to buy in the near future. Unfortunately, raising rates will add further pressure to household budgets and potentially limit what products are available.

Due to this trend, house price growth could decrease in some markets, such as London or Edinburgh; however, demand remains strong in areas like Aberdeen and Edinburgh for properties priced more realistically; buyers have taken advantage of opportunities available below Home Report valuation, something we may see again in 2023.

Private rental market activity in Scotland remains strong. Letting agencies Citylets and Rightmove have both recorded annual rental price increases of 12.4% and 11.2%, respectively, in Q1 2023 due to an acute housing stock shortage and rising demand for quality accommodation, leading to increases of 12.4% and 11.2%, respectively, during Q1. However, these figures must be seen against broader economic uncertainty and rising living costs, possibly leading some landlords to refinance into more cost-effective mortgage deals ahead of the forthcoming tax changes, potentially decreasing future rental property entering the market, and potentially reducing further rent increases in future quarters.

3. Housing supply

An increasing perception is that supply is limited as demand outstrips the supply of properties entering the market. This poses serious concerns as this would have an immediate impact on prices; furthermore, the Scottish Government’s 2023–2028 SHIP includes targets for affordable housing that must be met. With rising material and labour costs hindering new build activity and forcing rent increases for existing stock.

Prime market activity remains buoyant for realistically priced properties up to PS1.5 million in desirable locations, but buyers have become less willing to offer premiums over Home Report values, necessitating sellers being accurate in pricing from the outset if they wish to secure a sale.

Overall, Scottish house price inflation in Q1 2023 increased slightly year-on-year owing to an increase in Highlands and Islands house prices that was partially offset by declines in Aberdeenshire and Moray.

As the year unfolds, Rettie anticipates that its main markets will experience similar pressures as other parts of the UK, leading to reduced transactions with prices falling by 5–10 percent on average. Yet Rettie remains confident that demand for well-presented properties in sought-after locations will remain steady.

4. Demand

Though real estate prices have eased somewhat since their peak in 2022, demand remains strong. According to the Land Registry, sales above Home Report valuation fell marginally between March and May this year, though still more modestly than in July, when sales above Home Report valuation hit 14%.

Though economic conditions remain volatile, well-presented and realistically priced properties in desirable locations continue to draw interest from buyers with enough funds. To maximise sales agreements, sellers should set asking prices at levels that are easily affordable by purchasers; otherwise, a lengthy period of price stagnation could discourage prospective buyers and result in fewer sales being agreed upon.

As the market stabilises, landlords have become reticent to invest in new-build properties for fear of rent freezes or legislation that imposes additional costs on them. This trend will likely reduce overall supply in Scotland, which in turn drives up rents further.

In Q1 2023, Scottish prime house prices experienced a 0.2% annualised increase, leaving them 1.1% above where they stood a year prior. The Edinburgh market performed particularly strongly, with properties selling quickly in Morningside and Leith in just 13 days each.

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