MARKET CONTEXT

Economic commentators have been referencing Aberdeen’s micro-climate since the rapid oil price rise, which started in 2010. While the rest of the UK was in the grip of the economic downturn, Aberdeen was protected in its oil bubble. By the end of 2012, the real impact of rising oil prices was beginning to be felt within Aberdeen’s property market.

By the middle of 2014, average values increased to just over £200k. This was 48% above the Scottish average, with the number of transactions increasing to 11,253 by the end of September 2014, an annual rise of 12%.

The Aberdeen area is now feeling the chill of the downturn. The annual number of house sales dropped by 24%, from 11,253 during the year ending September 2014 to 8,577 during the year ending September 2016. Prime second hand sales at £400,000 and above, fell by 51%, from 663 during the year ending September 2014 to 322 during the year ending September 2016.

At the top end of the market, above £1 million, the number of transactions fell from 29 during the year ending September 2014 to eight during the year ending September 2016.

^{▲ Durris House, Banchory (offers over £700,000) sold earlier this year at an adjusted price in line with current market conditions}

High levels of equity

The buoyant oil-based economy in Aberdeen has resulted in a supply of contemporary homes built to a high specification and beautifully refurbished period properties. Many owners have witnessed their homes double in value since 2005. There is now a large level of equity, which will provide owners with some protection from price falls.

Stock levels rise

The real challenge at the heart of the local property market slump is the lack of transactional activity and the high number of unsold properties. The economic law of supply and demand dictate that prices are simply too high and out of step with what the market will pay.

The lack of adjustment in pricing, coupled with a continually decreasing number of transactions, is leading to an ever-growing glut of properties that are currently available to buy in the Aberdeen area.

The number of available second hand residential properties has jumped from 2,360 at the beginning of 2015 to 4,583 as of November 2016, which represents an increase of 94%. The lion’s share is in price bands up to £400,000 and includes many buy-to-let properties which have been impacted by an annual drop of 17% in monthly average asking rental prices (see Figure 2).

This has led to a reduction in those able to upsize to homes above £400k. The higher end of the market is being further impacted by the lack of buyers relocating to the Aberdeen area to work in the energy sector.

^{Source: Savills Research}

Price adjustments

Whilst the overall number of transactions has fallen by 24% between 2014 and 2016, the local market has yet to witness an equivalent drop in prices. According to the UK Government’s House Price Index, the average house price in Aberdeen City and Aberdeenshire was sitting at around £185,500 in September 2016, only 7% lower than the level in September 2014.

The prime second hand market in the Aberdeen area has not seen a significant adjustment in prices, despite the 51% drop in activity between 2014 and 2016. Average price reductions for prime properties that have struggled to sell have only been subject to, on average, a 5% price reduction this year, compared to -6% for the overall prime Scotland market. The prime Scottish market has experienced its own, well-documented downturn from 2007 until 2013. It was only when prices were appropriately adjusted to their pre-peak levels, that the equilibrium between supply and demand began to be restored and the market was able to start its recovery. There are certainly lessons to be learned from this period.

^{Source: Home.co.uk (Time on 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.)}

New build market

Interestingly, the new build market in Aberdeen is already adjusting to current conditions, with price reductions and incentives being offered at a number of developments. This has resulted in developments maintaining rates of sale, albeit at relatively lower levels. Encouragingly, there is strong house builder appetite in strategic land, and there is medium to long-term confidence in the Aberdeen area.

^{Source: Savills Research}

Elsewhere in Scotland

Overall house price growth has been lifted by strong performance across commuter and suburban locations around Edinburgh and Glasgow. However, prices have been suppressed by higher rates of Land and Buildings Transaction Tax (LBTT) impacting sales above £400,000 and the slowdown in the Aberdeen area market. However, the number of overall residential sales in neighbouring Angus and Moray increased annually by 6% and 3% respectively by the end of September 2016. In terms of average prices, Angus witnessed a slight annual increase of 1% during September 2016, whereas in Moray the average increased by 5%.

Conclusion

Oil has been the vital aspect of Aberdeen’s economy for a relatively short period of time. The restructure that is currently taking place within the sector is likely to result in a far more efficient, and sustainable industry.

House price inflation in Aberdeen requires a similar readjustment to ensure a sustainable market that is supported not only by oil but by a more broadly based economy.