Sellers finding ways round the housing crisis

A GLIMPSE at the property pages is all that's needed for confirmation that the current housing market crisis is not down to a lack of properties for sale. But while surveyors insist the supply of property remains very healthy, there's a chronic shortage in the supply of money with which to buy it.

A year ago buyers had over 15,000 mortgages from which to choose, and lenders were prepared to offer them 100 per cent mortgages – or more – to overcome affordability limitations, but the situation has changed dramatically. The number of mortgages available has fallen to under 4,000 in the last year and first-time buyers in particular have been frozen out of the market by lenders asking for bigger deposits.

The upshot is that it's taking longer to sell properties, if they are sold at all. While some homeowners have withdrawn from the market, most are sitting tight or looking at ways of getting around the problem.

One option being taken by a growing number of frustrated Edinburgh property owners is the Private Sector Leasing (PSL) scheme. Run by Orchard & Shipman, the scheme – the largest of its kind in the UK – secures properties for the City of Edinburgh Council to offer to those in need of housing. Run since 2005 with the aim of 1,500 properties, 1,300 are on its books already.

With PSL properties in all of Edinburgh's council wards and throughout Lothian and Borders, councils and tenants have a choice of housing. In return for letting out their property to the council for three to five years, landlords get a guaranteed rental income – generally matching or exceeding that on offer in the private rental market – with no voids or agency fees. They leave the management of the property in the hands of Orchard & Shipman and at the end of the term get it back in good condition. Landlords also know that they are contributing socially by helping people in difficult situations.

Its popularity has grown with property owners such as Hossein Fazeli (see case study) who are finding it increasingly hard to let out or sell their properties. "We're seeing a growing number of property owners who, for whatever reason, are having difficulty either selling on or leasing out their homes and they view the PSL scheme as the best option for them," said Angela McLachlan, director of operations for Orchard & Shipman in Scotland. "It works because it brings benefits to all parties: the council which faces huge demand to provide housing; the families desperate for accommodation in areas they want to live in; and the landlords who see the benefits of long-term income for their investments."

According to Andrew Morrison, director of Orchard & Shipman, recent months have seen a rise in enquiries from sellers who have bought a new property before they've sold their existing one. "Those people can use the scheme to get guaranteed rental income from the unsold property that will pay their mortgage and also offer the opportunity to benefit from house price increases over the next five years. So people who haven't been private landlords previously are getting into it."

More landlords could benefit in future, if the Scottish Government is to meet its target of giving homeless people who aren't deliberately homeless the right to permanent housing by 2012. As Scotland meets just 7 per cent of its temporary housing need from private rental stock – compared with 66 per cent south of the Border – there's no shortage of demand. Currently, according to Morrison, there's a particular need for properties in the Borders and East and Midlothian.

Another avenue being explored by more sellers is offering cash back to buyers rather than reducing their asking price. The Scotsman this week reported one Edinburgh homeowner's offer of 50,000 cash back for the buyer of his 599,000 house. Malcolm Young's house had failed to sell after several months on the market. But rather than reduce the asking price, Young insisted 599,000 was the right value. "I expect anyone who wanted to buy it could get a mortgage against the full value," said Young. "So, rather than reduce the asking price, we decided to offer cash back, which helps with stamp duty, legal costs and moving."

While cash back has been a tactic employed by several estate agents to help first-time buyers, its use by sellers is an indication of how difficult it is to sell in the current market without reducing asking prices. Incentives aren't only to clinch sales, however, but to catch the eye too, according to David Marshall of the Edinburgh Solicitors Property Centre. "Significant incentives such as cash back are used to attract publicity for the property and spark interest. With more properties on the market, sellers are looking for innovative ways to make theirs stand out."

But relying on incentives betrays unrealistic expectations, according to Alasdair Seaton, a partner in chartered surveyors DM Hall. "The bulk of properties are still at last year's prices and they're not selling. The market peaked between May and September last year, driven by people who could borrow 100 per cent or more at high income multiples. But that money has gone and at some point sellers will have to bring prices down."

However, sellers in some areas can point to relatively static house prices when they opt against reducing their asking price. "They are relatively consistent with this time last year, but the number of sales is falling, so sellers are just holding off until they get the price they want," said Marshall. "People are not feeling the pressure to cut prices yet."

Seaton at DM Hall made a similar point. "A lot of sellers are accepting they are in it for the long haul and they're leaving their house on the market for as long as it takes. Last year it was exceptional if a house was on the market for more than a month; this year it's exceptional if it sells within a month."