Price crash is pure scaremongering but there are constraints

IT'S hard to avoid the headlines screaming about house-price crashes – but that doesn't mean there will be one. I am not suggesting that house prices in Scotland are likely to rise this year as they have done in previous years – a fall is entirely possible, although increasingly unlikely.

What I suggest is that, rather than be led by hype about property prices crashing, it's worth looking more closely at the reality of the situation locally. According to the Edinburgh Solicitors Property Centre, for example, prices in the capital rose by a modest 2.3 per cent in May, compared with May 2007.

So why is market activity in the local property market now around 60 per cent of the level last year? Simply, the drop in activity reflects anxiety. The constant negative reports on the housing market not only fail accurately to reflect the reality on the ground but have battered the confidence of those seeking to buy and sell their homes. When people lack confidence about the biggest financial commitment of their lives they tend to sit on their hands.

Year-on-year in Edinburgh approximately the same number of properties have been coming to the market since January, but with less willing purchasers there has been a build up of available properties to buy. The result is likely to be a drop in the headline rate of "expected" prices compared to last year, but certainly not a collapse. But this is a false market caused by a short-term squeeze on demand rather than a fundamental shift in market players.

So how should buyers and sellers react? On the face of it there is little to assist the single seller with nothing to buy. What these sellers need to do is forget the figures of the market from three, six or 12 months ago because the landscape for them has changed. They need to be far more realistic about the price they are likely to achieve rather than the price they would like to achieve.

If you are selling a property and receive an offer that is lower than hoped for, consider the ongoing costs. If you are paying 750 a month for mortgage, council tax, insurance, repairs and so on, how many months payments does that price drop represent for you in these cost terms? If the market is to remain subdued there is no guarantee you will obtain the price you wanted and you might end up having spent additional costs, perhaps with no higher offer in sight. Conversely, if you are not prepared to consider any price drop, is it realistic to have your property on the market at all?

If you intend to sell and then buy, the "inter-connection" of the market offers opportunities to trade up. Take a simple example. Seller A hopes to sell at 100,000 and then buy at 200,000. Sadly they are only offered 90,000 due to market conditions. Those same market conditions are likely to have the same effect on Seller B who is looking to sell their property to Seller A for 200,000. On the same basis Seller A should now hope to purchase at 180,000 (both being 10 per cent below what was hoped for – not a 10 per cent drop in price, but rather in expectation). If Seller A does buy at 180,000 they not only recoup their 10,000 "loss" but make a 10,000 gain due to the higher price reduction on the same percentage for the next property.

In contrast, single or first-time buyers are increasingly questioning whether now is a good time to buy. Some have already concluded that they might do better to wait until the market improves. I would disagree, because right now buyers have a rare bit of negotiating strength, albeit one that is unlikely to last. In this sense a slowing market represents the best opportunity a buyer has of buying well, especially in a market with long-term over-demand/supply constraint problems.

The speculation now is about when the credit crunch will end. No-one really knows but 2010 seems a reasonable estimate.

When that end comes – and more likely before it comes – buyers will realise that, if the market levels out, prices will quickly start to move the other way.

The pendulum will start to swing back to the sellers who know that, if nothing else is certain, a lack of housing supply will be on their side for a long time to come.

• Jason Scott is a partner at Warners solicitors and estate agents