Housing slump may hit less hard in Scotland but it will still be a blow to buyers

STORIES reporting how the credit crunch is likely to affect the Scottish housing market currently all tend to say the same thing.

The headline on one such story in The Scotsman yesterday was typical: Scots to escape worst as UK house prices set to fall 7 per cent.

In other words, while there may be house price woe south of the Border, we will be all right up here.

I'd like to think that will be true, but I fear it won't be. My fears were reinforced by a housing conference in Edinburgh yesterday, organised by Shelter, the charity that campaigns on housing matters affecting poor people.

Here's something of what I heard.

First, this particular downturn in the housing market is unlike any that we have experienced before.

As Steve Wilcox, professor of housing policy at York University explained, most housing market crises are caused by general economic problems.

A recession affecting the wider economy, such as the one Britain experienced in the early 1990s causes unemployment and uncertainty. That in turn causes people to draw back from spending money on moving house, reducing the number of buyers and causing prices to fall.

But this particular downturn is quite different. It stems directly from the housing market itself, admittedly in America, but it is nonetheless primarily a housing finance problem. The credit crunch now afflicting the entire economy means that the supply of mortgage finance has greatly reduced and what is available is more expensive. And that, Wilcox pointed out, is a problem everywhere, whether you are trying to get a mortgage in Benbecula or Berkhamstead.

Why then, should Scotland escape this problem? The most commonly advanced answer is that house prices here have not risen as sharply as they have done down south. This doesn't seem a very convincing response. Even though Scotland's house-price bubble has expanded to a lesser degree than elsewhere, it is still a bubble. And fewer buyers means prices will fall.

Second, the housing market has changed quite dramatically since the last price downturn. The new element, according to Gwilym Pryce, professor of urban economics and social statistics at Glasgow University, is that buying a house is no longer solely about obtaining somewhere to live, but also about making an investment.

Since the early 1990s, many people bought houses in order to rent them out. In most cases, the rent received covered the mortgage cost and the landlord was more interested in the long-term capital gain. Some 40,000 buy-to-let mortgages were taken out in 2006 and buy-to-let landlords now control a third of all rented property in Britain.

But now that these investments are turning cold, what's going to happen to them? The majority of buy-to-let landlords own only a handful of properties. Even if a only a minority decide to sell, that will put a lot of extra property on to a market which already has a lot more houses for sale in it than it did a year ago. That can only depress prices further. And, I am assured, there are thousands of bought-for-let homes in Scotland.

You may think that falling house prices means that those people who have been frozen out of the market because of high prices will now stand a chance of being able to buy. Think again. The problem now, remember, is not a lack of houses, but a lack of mortgages for purchases. And the people who have been unable to buy mainly have low incomes. Bluntly, they are subprime and therefore riskier prospects for lenders. Banks are well aware of that, so, where a year ago they might have lent such a purchaser 95 per cent of the property cost, now they will only lend 80 per cent. And, of course, most of these would-be buyers cannot afford that size of deposit.

The Scottish Government has pledged to increase the rate of new house-building and to tackle the affordability problem. But private housebuilders and housing associations both told the conference they were reducing building activity and that what they do build will be more expensive. Housing is clearly going to become a big political problem.

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