Enjoyed FP's performance last night, though at times he did seem to be banging on a bit about global crisis rather than pointing out the particulars in Scotland this time. Looking at the latest CML Scotland information factsheet (http://www.cml.org.uk/cml/filegrab/Scotlan...08.pdf?ref=4838
), you can see pretty clearly when the Scots stopped being canny with their money and started blowing the same bubble as everyone else.
Looking at the graphs on the factsheet, you can see that the Scottish housing market was a picture of good health up until 2002. House price inflation was at a sustainable 5% or less. Ever increasing numbers of first time buyers were able to afford a property, and the average first time buyer's salary was increasing at a rate similar to house prices, keeping income multiples for loans steady at a very creditworthy 2.5x multiple.
Historically, it was the Scottish banks reluctance to lend at high multiples which kept the housing market steadier here than in the rest of the UK but that all changed in 2002. The huge expansion of RBS and HBOS in search of a quick profit, and the dangerously low interest rates of 2002 and 2003 kicked off the increase in income multiples. The emergence of the property "investors", mostly tart it up and sell it on developers or BTL, forced prices up at rates even higher than the rest of the UK, pricing many FTB's out of the market (down from 50,000 buyers in 2002 to 35,000 in 2007). While the overall picture in Scotland may be slightly healthier than the rest of the UK, this is certainly not a repeat of the 1990s when we pretty much avoided the crash, so bang goes that "it's different in Scotland" argument.
When it goes to the old supply and demand chestnut, the Scottish market (and Glasgow in particualr) illustrates pretty nicely how that works. Everyone seems to bang on about how a shortage in supply of housing will keep prices up. FP made the point that there is always going to be a shortage of the houses people would like to live in, since everyone wants a lovely 5 bed house in ample gardens. It's what people can afford to buy that really counts, and unfortunately there's also a pretty large shortage of that too. The one thing there isn't a shortage of are buildings (not necessarily nice ones) to put a roof over your head, there is a huge amount of sub standard housing stock in poor areas lying empty.
Looking at Scotland, the large increase in FTB's in the years up to 2002 prompted the government and councils to look for ways to increase the stock of "affordable" housing to let these buyers move from rental or living with family to ownership. The cheapest way to do this was to give permission for the development of a whole load of one and two bedroom city flats, either on brownfield sites, or replacing the social housing tower blocks of the 1960's. Developers were given cheap land and the permission to build high density, and sometimes rather suspect quality homes (do a search on Kingston Quay if you want a fine example). However, instead of providing the cheap flats for owner occupiers the politicians had hoped for, the investors riding the easy credit BTL boom snapped up all the newbuild at prices well beyond the reach of first time buyers. New build developers raked in the profits like never before, selling at huge margins. Investors grinned at the 10-15% capital growth while their 5% rental return easily covered the mortgage. People like me just drove past and wondered who on earth was actually going to live in these thousands of fancy and expensive new flats, occasionally wondering where all the people from the worst of the 1960's tower blocks that had just been demolished had moved to.
Looking at the supply and demand situation, there is still a huge demand for properties which can be bought for a deposit of 5%+ and a 2.5x salary mortgage (the way I bought my first flat). The credit crunch has evaporated the demand for properties at silly multiples. Increasing interest rates and no prospect of capital gains are scaring off the investors. The prices of properties will have to come down until the demand at those prices matches the supply of properties actually on the market. I have no idea what prices the supply and demand will actually meet at and house sales pick up again. We have certainly moved on from the time when income multiples were a sufficient guide to whether or not the market was overheated. The boom in buy to let means that investment returns on property are now probably just as important an indicator of where the prices are eventiually going.
Just a few thoughts there in my first post here. Mostly I'm just a curious observer, happy in the flat I'm in. I have a 2.3x salary mortgage tracking at 0.75 above base rate for the life of the mortgage (I'm so glad i took that deal three years ago instead of a cheaper fixed rate
), and won't be in negative equity until the market falls by about 45% so I guess I'm sitting pretty.