Jeff Salway: 'First-time buyers are largely frozen out of the market'

THE Registers of Scotland update published yesterday portrays a recovering Scottish property market with greater resilience than that south of the Border.

The average Scottish house price rose by 3.6 per cent in the three months to the end of June, a period which produced a decline across the UK as a whole.

Yet the impression may prove deceptive, with a number of factors suggesting Scotland cannot avoid the slump that many believe the UK housing market is poised to re-enter.

What we are already seeing across the whole of the UK is a shift in the balance of supply and demand. Last year prices rose as demand outstripped supply, with sellers reluctant to go on the market while prices were low.

That has now been reversed - sellers have adjusted their expectations and more homes are being put up for sale at a time when economic uncertainty is deterring first-time buyers from making their move.

A quick browse through property search websites including espc.com reveals that sellers in the capital are increasingly prepared to drop their asking price. And new research from property search website Zoopla.co.uk revealed that a almost quarter of current properties for sale in Glasgow have had their original asking price cut by an average of 6.9 per cent (just over 10,000).

As ever, the trend is more marked in England and Wales, where in some areas more than 40 per cent of sellers have slashed their prices in a bid to secure a sale, but it is also evident in Scotland.

The mortgage lending outlook is similarly downbeat. Lenders have become increasingly competitive in recent months, but almost all of the best new deals are aimed at borrowers with deposits or equity of 40 per cent. There has been a small increase in the availability of mortgages for buyers with deposits of 10 per cent or less but they are significantly more expensive.

First-time buyers remain largely frozen out of the market unless they have large deposits or generous relatives - and while demand from first-timers is subdued, there cannot be a sustainable recovery.

Yet it will only become harder for first-time buyers to get on the property ladder over the coming year, unless there is an unexpected improvement in lending conditions.

The Bank of England's latest credit conditions report predicted that most lenders will begin reducing mortgage availability in the coming months. The Council of Mortgage Lenders has issued a similar warning, pointing out that lenders will soon have to start repaying funding support provided by the government at the outset of the credit crunch.

The assistance, worth over 300 billion, was provided in 2008 to fill the gap left the collapse in wholesale funding markets but the government has so far refused to commit to further assistance. Without a further capital injection and with wholesale markets yet to thaw, the CML is not alone in forecasting a new tightening in lending conditions.

That's before we factor in the implications of the government's planned spending cuts, including higher unemployment, that will likely dampen demand even further. The housing market decline predicted by PricewaterhouseCoopers, Capital Economics and other economists will be less dramatic in Scotland, and particularly Edinburgh, but it seems no less inevitable.