Scotland's saw-edged route to property prosperity

Research carried out by estate agents Savills has projected that property prices will drop by 2.1 per cent in 2010, as the effects of the recession and rising unemployment continue to depress the market.

After this, prices will begin to climb – but, significantly, will not return to 2007 levels until 2013. House prices in Scotland have fallen by 8.1 per cent during the past 12 months to 127,000, the report said.

The recovery is predicted to be "saw-edged", indicating that there will be significant ups-and-downs to come, depending on local market conditions as well as macroeconomic factors such as interest rates and government policy.

Large-scale job losses such as those announced at Diageo in Ayrshire and Bausch & Lomb in Livingston could depress local markets, while the availability of credit from high street banks will be key to encouraging more first-time buyers to enter the market.

Positive growth will begin tentatively with 2 per cent in 2011, before gaining confidence over the next two years, with an 8 per cent, then 12 per cent rise predicted.

By the fourth quarter of 2013, average house prices could reach 154,008, surpassing 2007's average of 151,178.

However, for long-term recovery in the prime market, a reduction in the surplus volume of housing stock will be necessary, though this was already evident in Edinburgh and Glasgow, the report said.

It also reveals that, despite early resistance, Home Reports have been generally well-received, adding stability to the current uncertain market by giving both buyers and sellers realistic indications of price.

The positive projections come in the wake of bleak statistics for the Scottish property market.

In May alone, the Registers of Scotland, which records house sale statistics, showed that just 11,800 houses were bought in the first three months of 2009, a drop of 57 per cent against the same period of 2008.

Despite the encouraging signs of stabilisation and its optimistic outlook, Faisal Choudhry, Savills' head of research in Scotland, said that the recovery was linked to the wider economy.

He said: "Unemployment numbers may not have peaked and significant economic growth is unlikely to return until 2011.

"In such circumstances it is difficult to rule out the possibility that prices may falter by the end of this year. However, because affordability has been dramatically over-corrected, we believe any further falls will not be significant."

And he added: "Against this backdrop we anticipate long-term saw-edged recovery in the residential market, which will be influenced by the prevailing economic climate, the improved availability of mortgage finance and seasonal fluctuations."

Mr Choudhry also said that in the prime market – defined as properties above 400,000 – price falls had reduced and that the 4 per cent rises currently being seen in London were likely to be reproduced in Scotland at the turn of the year.

Jamie Macnab, head of Scottish residential property for Savills, said that the current state of the prime market meant there was scope to trade up.

"The froth has disappeared from the 1 million-plus market," he said. "Sellers are now accepting more realistic prices to secure a sale, creating a window of opportunity for those wishing to upsize from a house in the more competitive 400,000-800,000 bracket. This has led to a recent upturn in activity in the higher end of the market."

David Marshall, the Edinburgh Solicitors' Property Centre business analyst, said that their own figures were broadly in line with Savills' projections, with a rise in prices not anticipated until 2011.

But he cautioned that there were still dangers inherent in long-term projections.

He said: "Just now there are two risks: one is obviously the potential for rising unemployment, and the other is the potential for rises in interest rates, which are at historically low levels and there is only one way they can really go.

"But the broad picture is that we are expecting a period of stability in the market and we are not predicting that house prices will start rising quickly again."

Mr Marshall added that the damage done to the construction industry by the credit crunch meant that a shortage of properties could result in a situation in five to ten years' time where demand once again outstripped supply, resulting in another bubble pricing first-time buyers out of the market.

"There are a few things in favour of first-time buyers," he continued. "At the moment there are less people looking to buy, so there's less competition and prices are a bit lower, approximately across the board 10 to 15 per cent below the peak of the market."

But he added that mortgage lenders were still demanding large deposits from buyers, which Savills' figures also reflect. The report shows that while the level of mortgages being taken on has increased by 50 per cent, and was encouraging more buyers into the market, it states that these figures were "still well below normal levels".

Professor Kenneth Gibb, head of urban studies at Glasgow University, said that the upheaval in the property sector and the wider economy made any attempt to predict prices extremely difficult.

He said that Savills and other companies making predictions about the fluctuations of the housing market were trying to make difficult judgements about "feel-good factors".

He said a fundamental obstacle to making clear projections was the scale of the disruption caused by the credit crunch.

He said: "We're still trying to make sense of what has happened in the past two years. I do think it's difficult right now to make the sort of statement that previous models and their parameters hold good.

"I just think that it's very hard predict house prices when you are at a corner."

How the key indicators view the course of recovery

Edinburgh Solicitors Property Centre

Projections for the next two years are broadly in line with that of Savills.

The ESPC said that, beyond seasonal variations, there will be a period of stabilisation throughout 2010, before the market begins to see tentative gains throughout 2011.

The pace of price rises, the ESPC believes, however, will be much slower than that experienced prior to the credit crunch.

Nationwide

Reported last month that house prices rose for the fourth month running and at their fastest monthly rate in two and a half years. It is now predicting that prices look set to bounce back, with the market flattening out over the coming months. There is a possibility that prices could end higher than they were at the end of last year. However, it has cautioned that there could be one or two contractions too.

Bank of Scotland

Predicted that prices would fall at roughly 7 per cent over the duration of 2009 and move towards a stabilising point.

Its analysts have pointed out that the economic conditions and rising unemployment may prove to be stumbling block, but forecasts that the market will make "modest gains over the next year".

Moneyweek.com

The financial site believes headline figures about the market bottoming out mask the real extent of the fall. It believes that, when base rate for interest rates is lifted, the market will run into trouble, while the rising number of job losses will see more houses come on the market, pushing prices down.