As an economist who has worked in the housing market for more than 15 years, I used to be frequently asked about what interest rates were likely to do.
I now tend to be asked about what Brexit will do. Anticipating interest rate changes a decade ago was not easy, as they were much more variable than they are now, but it was a lot easier than anticipating Brexit.
When I wrote our recent Spring/Summer Market Briefing, I began: “Despite the travails of Brexit, the Scottish housing market has continued to perform strongly…” I got an immediate response from a client saying, “Despite Brexit, ha, ha, ha!”
Obviously, my pro-Brexit client was intimating that people like me thought that Brexit would prove disastrous and were proving ourselves wrong with our own market analysis. But I did not say that – Rettie & Co does not have a position on Brexit. I said: “Despite the travails of Brexit.” It does not matter if you are pro or anti-Brexit, it is clear the painful and laborious process is clouding the market in uncertainty.
In such circumstances, you would expect economic activity to weaken and for this to have a knock-on effect on the housing market. However, the market so far this year has been resilient.
The data for the first quarter of 2019 highlighted that transactions and average prices across Scotland were broadly the same against the same period last year – not bad, given the market uncertainty.
This picture is true in both Edinburgh and Glasgow. In Aberdeen, where the housing market has been battered by the reduced price of oil, there was a bounce-back of 14 per cent in market activity, with average prices on a par with a year ago.
This strongly hints at a much sought-after stabilisation that Aberdeen estate agents have been yearning for. Dundee, by contrast, is fast-emerging as a standout housing location with average house prices 10 per cent up on a year ago, making it one of the strongest-performing markets in the whole of the UK. Elsewhere, areas in commuter hinterlands such as East and West Lothian in the East and West Dunbartonshire in the West have seen double-digit growth in transaction levels.
However, there are concerns. Residential Land & Building Transaction Tax (LBTT) revenue in the first quarter of 2019 was down nearly 6 per cent on the same period last year despite a rising number of returns.
The bulk (nearly three-quarters) of LBTT revenue is collected from the market above £325,000 (just 10 per cent of total sales). These statistics clearly signal a softening of the upper part of the market.
Experience from other economic slowdowns shows that it is the top end of the market that tends to get hit first and hardest; in fact, it is a clear economic bellwether.
As we argued in our recent annual briefing on LBTT, a concern for the Scottish Government is that its taxation strategy has been to shift more of the tax take onto a smaller number of payers.
This remains a dangerous course for a government potentially facing a budget blackhole over the next few years, as highlighted by the Scottish Fiscal Commission recently. In my view, on LBTT at least, the government has too many of its eggs in too small a basket. The effects of fiscal drag will likely push more eggs into this basket unless the Scottish Government acts to make at least an inflationary adjustment to the bands on which LBTT is paid. With the interminable Conservative leadership contest taking over the front pages and the fact that we can all pour through passport control without much fuss this summer, perhaps the market is shrugging off Brexit for at least a little while.
But it will be back and it will certainly test market resilience later this year. And I still do not have an answer yet as to what it will do.
By John Boyle