Price spike could threaten housing market recovery

Scotland’s housing market resurgence could be short-lived unless action is taken to prevent a house price spike freezing out first-time buyers again, experts have warned.

Mortgage advisers, solicitors and estate agents in Scotland are reporting a surge of demand from first-time buyers as loan costs fall, lenders ease their criteria and confidence returns.

The average home in Scotland is worth £2,300 more than it was at the start of the year, according to research by LSL Property Services/Acadametrics, which said prices in Aberdeen leapt by 5 per cent in May alone.

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The recovery now looks to be “around the corner”, the Royal Institution of Chartered Surveyors Scotland said on Tuesday while revealing a marked rise in would-be buyers.

However, that rebound is under threat from a spike in house prices that will hinder first-time buyers without large deposits, it is claimed.

House prices are being pushed up by a combination of growing demand and low supply of both sellers and of affordable housing. That demand has been stimulated largely by the funding for lending scheme (FLS), launched a year ago to give lenders access to cheaper borrowing and credited with forcing down mortgage costs.

The FLS is due to run until 2015, while the second part of the UK government’s help-to-buy scheme will be implemented in Scotland over the coming months.

But the combination of the FLS and help-to-buy could cause a fresh house price bubble, according to critics including Business Secretary Vince Cable, pictured right. Ratings agency Fitch has also waded into the debate, predicting that help-to-buy would accelerate house price inflation while widening margins for both lenders and builders.

And consultant Capital Economics said that, as the schemes push overvalued house prices even higher “it seems increasingly likely that they will do little to sustainably improve the plight of first-time buyers locked out of the market”.

Ian McGrail, director of Scottish adviser First Mortgage, agreed: “Government plans to extend the initiative up to 2015 are cause for a considerable degree of concern as we do not want to see the market run away with itself and see a return to pre-crunch activity where buyers had to offer significantly over the valuation to secure a home.”

David Marshall, a business analyst at Edinburgh Solicitors Property Centre (ESPC), added another note of caution.

“We would certainly hope that such initiatives are kept under constant review so that if and when house prices start to rise again these schemes can be scaled back or discontinued accordingly,” he said.

House-price increases in Scotland could be compounded by the effect of home reports, according to McGrail. He argued that, by deterring homeowners from putting their property up for sale, the reports, introduced in December 2008, are accentuating the imbalance in supply and demand.

“These reports are a frustrating impediment to growth across the whole market through first-time buyers as they drive up prices and cause unwanted delays in the already stressful home buying process,” he said.

The Scottish Government is to review home reports later this year and faces growing calls for them to be reformed or even scrapped.

The Council of Mortgage Lenders and the National Association of Estate Agents in Scotland have also suggested that home reports are unsuitable for the current housing market.

But home reports aren’t the problem, insisted Robin Purdie, director of Mov8 Financial in Edinburgh. Instead the issue is that sellers are often too greedy, he claimed.

“Now that things are starting to recover it would be wrong to exclusively blame home reports for lack of stock. For me, the main reason for sellers not coming on the market is an unrealistic expectation of what they think their property is worth, or them not having enough equity to fund the onward purchase,” he said.

“If it’s the report cost that is the issue rather than selling price then sellers can’t have it both ways.”