Prime market

Up until the end of June 2016, prime sales (second hand transactions at £400,000 and above) across Scotland reached 3,012. This represented a 19% annual drop from the 3,710 prime sales that were recorded during the previous 12-month period, largely due to the surge in sales that took place during the first three months of 2015, ahead of the introduction of higher taxation rates under LBTT from April 2015. In comparison with the previous 12-month period ending June 2014, the overall Scottish market in terms of transactions increased by 10%. However, the number of prime sales increased by only 1% since the year ending June 2014, showing the effect of higher rates of taxation on sales above £400,000 across Scotland (see Figure 1).

^{Source: Savills Research}

Although prime activity between £400,000 and £600,000 has improved in most central hubs, country locations are less active. The prime market in the Aberdeen area continues to be impacted by the slow down in the energy sector, with the lowest level of prime transactions recorded in five years. The local oversupplied mainstream market (where the level of stock has increased by 85% in a year) is impacting prime market sales and these have fallen by 37% in two years.

Across Scotland, the market between £600,000 and £1 million is struggling to adjust to LBTT, with 11% fewer sales compared to two years ago. Meanwhile, the market between £800,000 and £1 million in Edinburgh remains challenging (see Figure 2).

^{Source: Savills Research}

A closer look at local level prime market performance during the year ending June 2016 shows the dominance of traditional hotspots and continued growth in commuter and suburban locations (see Figure 3).

^{Source: Savills Research}

In Edinburgh, the majority of prime activity took place in the core central locations of New Town, Grange, Morningside and Merchiston. However, prime activity in the West End, Stockbridge, Murrayfield, Trinity and Colinton exceeded the level during the year ending June 2014.

Edinburgh’s prime market strength has fuelled surrounding areas such as the Borders, which has led the way with prime activity 25% higher than the five-year average.

Prime sales in Glasgow’s West End are 19% higher than the five-year average, whilst in Lanarkshire, prime sales are 22% higher, led by the hotspots of Bothwell and Thorntonhall. Helensburgh has witnessed the highest number of prime sales for five years due to more certainty surrounding the future of Faslane.

Looking ahead, high levels of activity, in terms of new buyer registrations and viewings is likely to underpin future prime sales activity in the medium term.

Million Pound Market

The number of residential sales at £1 million and above reached 146 during the year ending June 2016, which is in line with the five-year average, with more than half of these sales occurring in Edinburgh (see Figure 4).

^{Source: Savills Research}

The capital is benefitting from the fact that in times of uncertainty, high net worth investors are drawn to prime central hotspots, which are considered safe investments.

Aberdeen has witnessed a reduction in million pound activity from a five-year average of 22 to only 13 sales in the latest 12-month period.

Greater Glasgow has regained its second place with 19 such sales taking place. This was supported by 10 in the city itself, the highest number since 2008. East Lothian has continued its strong performance with 10 sales, closely followed by Fife where there were nine sales, all of which took place in and around St Andrews.

Interestingly, despite the slow adjustment of the market from £600,000 to £1 million, sales above £1 million are coping with the higher rates of LBTT.

Looking ahead, we expect this market to remain stable, with around 140 to 150 annual sales taking place, as this market is better able to absorb higher rates of LBTT.

Robust Market Below £400,000

There was robust growth in the market below £400,000 despite the slow down in the Aberdeen area market. There was a 9% annual increase in the number of Scottish residential transactions during the year ending June 2016. Furthermore, the average price in Scotland increased annually by 5% in June 2016 (see Figure 5).

^{Source: UK House Price Index June 2016}

Market growth is continuing to spread out to locations that were lagging following the housing market downturn. These include East Ayrshire, North Ayrshire and Dundee City, where the annual growth in transactions was higher than the figure for Scotland as a whole. This is mainly due to an increase in house building, coupled with attainable house prices and improving transport links. Annual transactional growth in traditional hotspots and commuter locations, such as Midlothian, South Ayrshire and Renfrewshire, as well as the market hubs of Edinburgh and Glasgow, also exceeded the figure for Scotland as a whole.

Mortgage lending plays a fundamental role in the Scottish housing market, with typically around two thirds of transactions dependent on loans for house purchasing. The number of mortgages across Scotland for house purchasing increased by 7% during the year ending June 2016. The average mortgage rate for house purchases and remortgages across the UK during June 2016 was 2.5%, compared to almost 6% during the peak of the market in 2007. However, the best mortgage rates are restricted to those with high levels of equity.

Looking ahead, much depends on what happens to base rates and mortgage lender margins. Whilst the Bank of England base rate has fallen, there is a risk that the cost of mortgages may rise further down the line, as banks seek to protect their margins. Overall, that could put a squeeze on affordability at the point of purchase but not a rapid tightening across a wider cross section of mortgaged homeowners. The potential for mortgage lenders to tighten their criteria presents a longer term risk to market activity below £400,000 across Scotland. This could mean that transactions, which reached a post credit crunch high of almost 101,000 over the past year, could fall back slightly. Fundamentally, the market below £400,000 in Scotland will be underpinned by a continued environment of low interest and taxation rates and low supply.

Time on market

The length of time houses take to sell is a useful indicator of market strength. Favourable rates of tax up to £325,000, low mortgage rates and government initiatives have boosted the overall Scottish market and properties are currently taking considerably less time to sell.

Across Scotland’s cities, properties are staying on the market for an average of 18 weeks, compared to 26 weeks during the downturn between 2011 and 2013, according to a leading industry website (see Figure 6).

^{Source: Home.co.uk (Time on the Market is the number of weeks a property has been listed for sale. A property may be withdrawn from the market for reasons other than a successful sale.)}

The cities of Glasgow and Edinburgh in particular have seen a sharp reduction in the number of weeks. The length of time in both cities during August 2016 was respectively 23% and 19% less than their five-year August average.

However, the largest reduction has taken place in Stirling and Inverness, where properties spent 35% and 25% less time on the market respectively during August 2016, compared to their five-year August average. The high level of stock has led to houses in Aberdeen spending 50% more time on the market during August 2016 compared to last year.

According to the website, the actual time taken from a property coming onto market to reaching a sold status across Scotland’s cities is on average nine weeks. Selling times in Edinburgh, Glasgow and Inverness are the lowest among Scotland’s cities, with houses currently taking on average of seven to eight weeks to find a buyer.

LBTT update

Despite the fact that the number of residential transactions across Scotland increased by 15% in two years prior to the end of the financial year (31 March 2016), the level of tax revenue in the same period fell by 7% and was £33 million short of the £235 million target set by the Scottish Government.

This is due to the very low rates of tax applicable to the market up to £325,000, where the bulk of sales took place. Without the surge of sales which took place at the beginning of 2016, ahead of the introduction of the additional LBTT levy, the revenue would have been approximately £43 million lower than the Government’s target.

Comparing like-for-like time periods, the number of residential transactions between £450,000 and £750,000 fell by 9% and those above £750,000, where a 12% LBTT rate has been applied, fell sharply by 27%.

According to our research, around 44% of the LBTT revenue was generated from sales above £450,000, despite making up just 3% of residential sales. In our opinion, this is very risky, as it places a great burden on a small percentage of buyers. Furthermore, almost 30% of LBTT revenue was generated from Edinburgh.

LBTT is impacting on the competitiveness of Scotland, with some investors comparing the cost of moving to the rest of the UK. This affected sales at the top end of the market to buyers from outside Scotland during 2015.

There are widespread calls for changes to the 10% tax band, which has heavily impacted the market between £325,000 and £750,000.