Most chartered surveyors, according to their trade association, have observed a decline in house prices since April, marking the first such decrease reported by the Royal Institution of Chartered Surveyors (RICS) since June 2020. Nationwide recently announced that UK house prices experienced their sharpest annual decline in 14 years in July. Factors such as higher interest rates making mortgages more expensive and escalating prices impacting individuals’ spending power have contributed to this trend.
During the last reported price decline by RICS three years ago, pandemic-related restrictions limited property viewings, and widespread economic uncertainty surrounding jobs and incomes prevailed. Over the three months leading up to July, every region of Britain, except Northern Ireland, expressed a more pessimistic sentiment regarding prices. The survey also revealed a significant decline in the price outlook for the next three months and in the number of transactions.
As interest rates have steadily increased over the past 20 months, a majority of RICS surveyors note a decrease in prospective buyers entering the Scottish housing market, leading to a more negative outlook than seen in the last decade. While these findings reflect shifting market sentiment, they do not quantify the extent of price or transaction declines, or their expected future trajectory.
Surveyors attribute the slowdown in the housing market primarily to the increased cost of borrowing for mortgages. Alan Kennedy from Shepherd surveyors in Fraserburgh noted that higher interest rates have dampened market activity, although demand still exceeds supply in certain sectors. While rising borrowing costs typically suppress market activity, if demand surpasses supply, it can sustain or even elevate prices.
Craig Henderson from Graham & Sibbald in Ayrshire highlighted that ongoing inflationary pressures are leading buyers to carefully consider purchase decisions. Although prices in his area have remained stable thus far, their trajectory later in the year will hinge on borrowing costs and ongoing inflation, prompting caution among buyers.
Greg Davidson, also from Graham & Sibbald in Perth, noted hesitancy in some market sectors due to increased costs but mentioned that the underlying market appears stable. He emphasized the persistent lack of supply in certain key areas, with demand continuing to outweigh supply.
Simon Rubinsohn, RICS’s chief economist, highlighted the pressure on both buyers and renters, as supply fails to keep pace with demand for property leases. Despite the cost-of-living crisis, demand remains strong, supply constrained, and rents are expected to continue rising sharply.
According to the most recent data from Registers of Scotland, house prices in Scotland increased by 3.2% over the year to May, reaching an average of £193,000. However, Halifax’s House Price Index paints a different picture, showing Scottish prices down by 0.7% over the past year, while UK prices dropped by 2.4%. Despite recent declines, it’s important to note that prices had surged post-pandemic, with August last year marking the peak of the market when annual inflation exceeded 12%.
After the housing market reopened, there was a surge in demand for homes, driven by a desire for more space following lockdowns. Additionally, with more people working remotely and commuting less frequently, there was increased interest in homes located further from urban centers.
In the new-build sector, major housebuilders have reported to investors about a softening market and rising construction costs. Some companies are scaling back their building plans as a result. For instance, Bellway noted a decrease in completions and a 28% decline in buyer reservation rates for new homes compared to last year. Taylor Wimpey experienced a 25% decrease in home sales in the first half of the year and a significant reduction in profit margins. However, the average price of their sales increased by nearly 7% compared to the previous year. Similarly, Persimmon Homes reported a more than one-third decrease in new house completions and a significant drop in pre-tax profit.
A representative from Homes for Scotland commented on the resilience of Scotland’s housing market amid challenging conditions but expressed concerns about the substantial shortfall in new homes since 2008. They highlighted the downward trend in new starts and major residential planning applications, suggesting that Scotland’s housing crisis could worsen without urgent action on planning, a coordinated approach to achieving net zero emissions, and support for first-time buyers and smaller homebuilders.
While prospective homebuyers may welcome falling prices, homeowners and property agents will likely appreciate the decline in mortgage rates, which could alleviate downward pressure on prices. Despite potential future increases in the Bank of England base rate, money markets anticipate a decline over the term of fixed-rate mortgages, influencing longer-term funding rates for lenders. Major lenders, including Halifax, have responded with rate cuts, signaling a trend in the mortgage market.
