A 10 seconds survey, the richest neighbourhood in Scotland and our Brexit Property series part 3

It is natural for people to take an interest in celebrities and those people lucky enough to be regarded as rich. Statistics released by the Land Register of Scotland have highlighted those areas in Scotland where the average price for property is highest.

In our series on Brexit and the Scottish Property market, we have highlighted the changing nature of Edinburgh in relation to other regions of Scotland. We described Edinburgh as a "mini-London" and that description is borne out by the analysis of those transactions (in the latest year of statistics) for properties in excess of £1,000,000. More than 72% of these transactions were in the Edinburgh area with Glasgow and Aberdeen around 12% and 3% in Fife.

The highest average price was those 3% in Fife amounting to over £1.6 million. But the message of this brief look at Scotland's wealthiest neighbourhoods demonstrates that the Edinburgh area has the same impact on Scotland as London has on England. Whether that is a good thing is open to debate because a distorted housing market leads to unintended consequences as is highlighted in the next article.

Brexit and the Scottish Property Market Part 3

So far in Part 1 and Part 2 we have highlighted the distortions in Scotland caused by changes in demand and the nature of society. Our aim is to demonstrate that the effect of Brexit on the Scottish property market, whether positive or negative, will not be felt equally. Most commentators believe that the impact of Brexit upon the property market will be negative. How can we estimate its impact?

The first reaction of most people when assessing the effect of political or financial events on the housing market is to think about house prices. However, much more relevant is the impact on the volume of transactions; in a market constrained by a lack of supply prices are generally determined by demand. If Brexit makes us feel less confident then more people are likely to put off their next house move; our 10 seconds survey later in this email will allow you to tell us how you feel.

The Edinburgh area "halo" based upon government, regulation and banking will result in the impact of Brexit (if negative) being less severe than in other parts of Scotland. Local conditions such as the downturn in the oil and gas industry mean that areas such as Aberdeen are suffering from low confidence; that will reduce volumes of transactions which eventually, in turn, will impact upon price levels.

Time for government to act intelligently?
  But there are other factors which heavily influence the property market where government and regulators could act more intelligently. Because property is static, it is a remarkably attractive target for governments to tax and regulate. Taxes fall into two groups. The first is transaction based taxes such as stamp duty (called LBTT in Scotland) and the second are annual taxes which we know as Council Tax.

Governments of all hues act in the same manner. It is far easier to increase transaction based taxes which penalise only those who are moving than to introduce a fair and reasonable annual property tax. It is far simpler to present annual charges as the preserve of local authorities when the reality is the opposite. The approaches to property taxation over the last 50 years have undermined mobility, distorted prices and reduced the value of the economic activity that would have otherwise resulted.

The current stamp duty legislation in Scotland (remember it is called LBTT!), introduced in 2015, reduced the transactional cost for properties below approximately £300,000 but increased the tax for properties above £300,000 and exponentially further up the scale.

Mystic Meg not required
The net result is easy to predict. Those parts of the housing ladder above £300,000 and especially higher-priced properties (except in those areas of high demand such as Edinburgh) have suffered badly. When a family in Glasgow have an existing suburban property worth say £400,000 and wish to move to a house worth £500,000, land-related taxes would exceed £25,000. If it fell within the group of transactions affected by the Additional Dwelling Supplement the land related taxes would be in excess of £40,000.

Faced with such taxes, the reaction of many prospective movers is to abandon their plans or spend the money extending their existing house. In several areas in Scotland this taxation regime has undermined the upper middle and upper parts of the market. The response from readers may be a shrug of the shoulders but the result of this is that there is a considerable shortage of properties available in the middle market. Accordingly, outside of the areas of considerable demand, the property market in Scotland is no longer efficiently working. This reduces economic activity, reduces mobility and reduces opportunity.

The Scottish Government is aware of these issues and many others relating to property taxation. A recent commission set up by the Scottish Government surprised many observers in suggesting only small changes to the current system of taxation. Because Council Tax bands have not been changed since 1991 with the top band relating to a property worth £212,000 that year, it means that wealthy people are often paying the same amount of council tax as families working hard to make ends meet.

And finally... In summary, there is a big picture that needs addressed. Because of the anxiety to remain popular, no government is likely to take the necessary steps of reducing transaction taxes and increasing property taxes (subject to a safety net for those unable to pay the increased taxes). Such a move would allocate property tax to those areas which benefit from government created activity and make more viable property transactions further afield.

Whatever the impact of Brexit, this counterintuitive property taxation system will result in further distortion of the market. At the same time the property market will fall short in underpinning both opportunity and economic activity in Scotland.

Take our 10 seconds property survey (we will send you the results)

Hopefully, you have been enjoying our series on Brexit and the Scottish Property market (the following links take you to Part 1 and Part 2) It would be tremendous if you could now let us have your view on how Brexit has impacted upon your intentions. The survey should take you no more than 10 seconds and we will send you details of the results.

Take the Survey