Scottish Housing Market Review: Q2 2023

Key points for this issue

Sales

• While transactions stabilised after the volatility caused by the Covid-19 pandemic, there is now evidence that the level of transactions is falling in response to higher interest rates.Registers of Scotland statistics show that number of residential property transactions in Q1 2023 was down by 1.9% compared to pre-pandemic average for Q1 (2016 - 2019), while Revenue Scotland data, which is more up-to-date, shows that over the period January to May 2023, Land and Buildings Transaction Tax returns were 9.4% below the corresponding months in 2019.

House Prices

• Higher interest rates are also weighing on the previously elevated level of house price inflation,with house price inflation falling from the recent peak of 13.3% in Q3 2021 to 2.0% in Q1 2023. [Source: UK House Price Index (HPI)]
• The strongest annual price growth by property type in Q1 2023 was for detached properties, up by an annual 3.7%, whilst flats increased by the lowest amount, up by 0.2%.
• The average new build property price increased by an annual 11.8% to £284K in Q4 2022, higher than the increase on the average existing build price of 4.6% (note these figures are one quarter behind other HPI data).

Rental Prices

• Private housing rental prices for new lets (which are not subject to the Cost of Living (Tenant Protection) Act) continue to increase. In Q1 2023, letting agencies Citylets and Rightmove recorded annual private rental increases in Scotland of 12.4% and 12.3%, respectively.
• Measures relating to the private rented sector under the Cost of Living (Tenant Protection) Act have been extended to 30 September 2023. In addition, Tenants' Rights Minister Patrick Harvie has confirmed proposals to extend these measures until 31^st March 2024, at the latest, subject to parliamentary approval.

Lending

• Lending to both first-time buyers and home movers has fallen relative to pre-pandemic levels:over the 4 quarters to Q1 2023, new mortgage advances to first-time buyers in Scotland decreased by 8.7% and to home movers by 8.9% relative to the 4 quarters to 2020 Q1. [Source: UK Finance].
• There has been a significant fall in mortgage approvals (a leading indicator of housing-market activity).Over the period October 2022 to May 2023, approvals in the UK have on average been 27% lower than they were in the corresponding months of 2019, prior to the pandemic. [Source: Bank of England]
• Lenders reduced the number of residential mortgage products over the month to 1 June from 5,264 to 4,967 (-5.6%), the largest monthly fall since October 2022 following the mini-budget / UKG Plan for Growth. [Source: Moneyfacts Mortgage Treasury Report]
• The Bank of England has increased the Base Rate thirteen times since December 2021, taking the rate from 0.1% to 5.0%. This has fed into significant increases in mortgage rates, with the average advertised two-year and five-year fixed mortgage rates reaching 6.47% and 6.01% respectively at the beginning of July 2023 following the 50 basis point increase in the Bank Rate at the June Monetary Policy Committee meeting [Source: Moneyfacts].
• Tighter conditions in the mortgage market are also reflected in the decreasing share of higher-risk lending.The share of mortgage advances in the UK with both a high LTV and a high income multiple fell by 1.2% points from the previous quarter to stand at 3.4% in Q1 2023. [Source: FCA]. This has also fed into average LTV ratios, with that for new mortgages advanced to first-time buyers in Scotland falling by 2.3% points over a one-year period to 80.1% in Q1 2023 and to home movers by 3.8% points to 68.4%. [Source: UK Finance].
• The number of regulated mortgages entering arrears across the UK rose by an annual 63.1% in Q1 2023, although from a low base: relative to the pre-pandemic level in Q1 2019, the number of regulated mortgages entering arrears fell by 3.1%. [Source: UK Finance]. A new mortgage charter has been agreed with lenders to provide support to residential mortgage customers.

Housing Supply

• There were 23,512 all-sector new build homes completed in the year ending Q1 2023,an annual increase of 8.8% (1,897 homes). However, the number of new build homes started decreased by 2% (305 homes), with 19,204 starts in the year to end March 2023, down from 19,509 starts in the previous year. [Source: SG]
• A total of 10,458 affordable homes were delivered in the year to Q1 2023, an annual increase of 7.2%.However, approvals and starts have decreased over the year to Q1 2023, in-part caused by increased costs in the construction.

Housebuilding Output and Material Prices

• Construction output price inflation for new public and private housing increased by 10.4% annually to April 2022.[Source: ONS]One of the drivers of output price inflation has been large increases in theprices of construction materials used in new build, although the annual growth rate has moderated from 24.0% in June 2022 to 7.6% in April 2023. [Source: UK Government]
• Following a dip due to the business support available during the pandemic,insolvencies of construction firms registered in Scotland have returned to pre-pandemic levels: there were 202 insolvencies in the year to Q1 2023, compared with 210 in the year to Q1 2020. [Source: The Insolvency Service]

Data to: 30 June 2023

Contact: Jake.Forsyth@gov.scot; Bruce.Teubes@gov.scot