The Scottish Government

« Previous | Contents | Next »

Listen

Scottish Economic Report: March 2004

3.5 Housing Market

Average house price increases in the UK continue to run ahead of the long run trend. The situation in Scotland is also one of above trend growth in house prices, with evidence recently emerging from some quarters that growth rates in Scotland have overtaken the average UK increase. For example, the latest Nationwide House Price Quarterly Review suggests Scottish house prices in 2003 Q3 rose by 3.3 per cent over the previous quarter compared to 3.1 per cent for the UK as a whole. Year on year, they report house price inflation in Scotland of 16.6 per cent, ahead of the UK average of 15.5 per cent.

The continuation of above trend price rises is as a result of a number of interconnected factors. The strong and sustained economic performance in the UK has led to higher earnings and, particularly for those already on the property ladder, an ability to fund increased mortgage payments. This can be most evidently seen from the increases in the house price to earnings ratio. For the UK as a whole the ratio has risen from 4.5:1 in 2000 to 5.7:1 in 2003. The increase in the Scottish ratio is lower, up from 3.0:1 in 2000 to 3.6:1 now.

A further factor in price growth comes from the current and sustained low levels of interest rates in the UK. Lower interest rates make larger mortgages more affordable. Thus despite home owners taking out a proportionally larger loan relative to their income (with the mortgage loan to income ratio increasing from 2.4:1 to 2.8:1 in the UK and 2.1:1 to 2.3:1 in Scotland over the same period) mortgage repayments as a proportion of income have fallen over the last year to under 10 per cent in Scotland . Ratios have fallen in all other UK countries, but each still remains above the Scottish level.

The supply side is also a factor in house price increases. House building levels in the UK are currently at their lowest level since the end of the war as declining output from local authorities has not been replaced by increased private sector construction. The current output of around 185,000 houses per year is less than half the level seen in the peak year of 1970. The importance of the supply shortage has been heightened by a growing demand from an increasing number of UK households. The interim Barker report has highlighted a number of possible factors responsible for the lack of any positive supply response in the face of this increasing demand. These include the current planning system, the slow release of land for housing, and real constraints in the construction industry, although house building in Scotland has been increasing marginally over the last decade rather than falling. While there is also felt to be no overall shortage of land for new housing in Scotland, pressures are occurring in particular locations and the development of some land is constrained by infrastructure deficits such as water, drainage and transport.

Looking forward, the comparatively low price to earnings and mortgage loan to income ratios in Scotland mean that the current large annual price increase can be accommodated. Strong economic fundamentals coupled with relatively low levels of borrowing in relation to income will make any adverse reaction to the recent increase in interest rates, and the possibility of a house price correction, smaller than in most other UK regions. However, a rise in the cost of borrowing could begin to moderate Scottish house price increases back towards a more sustainable long-term level.

« Previous | Contents | Next »