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With Scotland making the headlines on a daily basis this week due to the crucial independence vote on Thursday, it is no surprise that property prices are a focal point. A Yes vote in this week’s Scottish referendum would jeopardise the UK’s housing market recovery, according to the latest index report from Rightmove.
It goes as far as saying that the UK’s housing market recovery, after a year of heightened consumer confidence and the healthiest transactions levels seen since the pre-crisis peak, could be put into reverse.
Rightmove analysts are forecasting a dampening of house prices should Scotland break away from the 300 year old union. “Even the very debate around Scottish independence and possible implications for the economic outlook for the rest of the UK could cause uncertainty in the minds of potential homemovers contemplating a large long term financial commitment,” said Rightmove housing analyst Miles Shipside.
He claims that speculation amongst economic forecasters on topics such as upward pressure on interest rates, availability of wholesale funding for lenders, and the geographic location of major financial institutions are potentially destabilising influences on the property market. Mortgage experts have waded in, saying that hundreds of thousands of Scottish home owners could see their mortgage repayments increasing far beyond their wages if an independent Scotland is forced to adopt a foreign currency.
It is claimed that lenders may refuse to switch current loans to a new currency and will instead keep them in sterling. This would leave Scotland’s 800,000 home owners at the mercy of currency fluctuations that could lead to higher repayments and even negative equity on their homes.
According to Ray Boulger, from mortgage adviser John Charcol, lenders did not have clauses in their terms and conditions that would allow them to change the currency of existing loans. This includes the UK’s biggest banks Lloyds Banking Group, Royal Bank of Scotland and Barclays. Lloyds and RBS have already indicated that they will move their headquarters to London if there is independence.
Boulger claims that if the pound strengthened against the new Scottish currency, borrowers’ wages would not stretch as far, sending their repayments shooting up and increasing the mortgage relative to the property’s value.
A flat in Scotland worth £100,000, for example, would be worth just £80,000 if the local currency fell 20% against the pound. Against a mortgage of £75,000, which would still be priced in sterling, the buyer’s equity tied up in their property would fall from £25,000 to just £5,000.
“Most Scots would end up with a mortgage on a Scottish property in a foreign currency. These are amongst the riskiest mortgage products available because of the impact that currency fluctuations can have on borrowers’ equity and their ability to carry on meeting the repayments,” said Boulger.
However, currency fluctuations can swing either way, so it is possible that if there is a Scottish pound it could strengthen relative to the English pound, putting Scottish borrowers in a favourable position.
According to Boulger, most lenders would have no interest in issuing foreign currency mortgages, just as they don’t lend to other overseas borrowers in France or Spain. He believes that for Scottish borrowers the choice of lenders will be far fewer and their options will become more expensive as a result.
The Council of Mortgage Lenders has so far not commented on which lenders are likely to carry on operating in Scotland.
According to David Hollingworth, a broker with London and Country, if banks and financial institutions move staff out of Scotland there could be a flood of properties coming onto the market and fewer buyers, dragging prices down.
“Fewer workers means fewer buyers, which will impact on what people are prepared to pay for a property,” he said.
But he had not taken into account the new jobs that would be created. There are reports of some buyers in Edinburgh insisting on a clause in their mortgage contract stating they will only pay the agreed price if Scotland votes against independence. But people in Scotland are much more relaxed about it.
The most recent poll shows that a third of people think house prices in Scotland will fall if the country becomes independent while about the same number believe prices will rise.
The data shows that 32% of people believe independence could cause the value of their house to fall, 31% think it will lead to a price increase, 24% said they did not know, while 13% said they did not believe Scotland would vote to leave the union.
Almost half of those surveyed, 46% said they think independence would make it harder to get a mortgage, 19% said it would be easier and 35% said it would be no different. Despite uncertainty over the result of the referendum and the potential rise or fall in property prices, 59% said that the referendum has no influence on their decision to buy or sell at the moment.