How Would a Hard Brexit Affect Shetland House Prices?

I have been asked a number of times recently what a hard Brexit would mean to the Shetland property market. To be frank, I have been holding off giving my thoughts, as I did not want to add fuel to the stories being banded around in the national press. However, it’s obviously a topic that you as Shetland buy to let landlords and homeowners are interested in … so I am going to try and give you what I consider a fair and unbiased piece on what would happen if a hard Brexit takes place in March 2019.

After the weather and football, the British obsession on the UK property market is without comparison to any other country in the world. I swear The Daily Mail has the state of the country’s property market on its standard weekly rotation of front-page stories! Like I have said before on my blog, there are better economic indexes and statistics to judge the economy (and more importantly) the property market. If you recall, I said the number of transactions was just as important, if not more, as a bellwether of the state of the property market.

Worries that the Brexit referendum would lead to a fast crash in Shetland (and national) property values were unfounded, although the growth of property values in Shetland Islands has reduced since the referendum in the summer of 2016.

Now, it’s true the Shetland property market is seeing less people sell and move and the property values are rising at a slower rate in 2018 compared to the heady days of the first half of this decade (2010 to 2015), but before we all start panicking, let’s ask ourselves, what exactly has happened in the last couple of years since the Brexit vote?

Shetland house prices have risen by 7.34% since the EU Referendum…

…and yes, in 2018 we are on track (and again this is projected) to finish on 282 property transactions (i.e. the number of people selling their home) … which is less than 2017 … and only slightly below the long term 12 year average of 303 transactions in the local council area.

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So, it appears the EU vote hasn’t caused many major issues so far, however, if there was a large economic jolt, that could be a different game, yet how likely is that?

The property market is mostly influenced by interest rates and salaries.

A hard Brexit would subdue wage growth to some degree, yet the level of the change will depend on the undetermined type of Brexit deal (or no deal). If trade barriers are imposed on a hard Brexit, imports will become more expensive, inflation will rise and growth will fall, although at least we are not in the Euro, meaning this could be tempered by the exchange rate of the Pound against the Euro. In plain language, a hard Brexit will be worse for house prices than a deal.

So why did the Governor of the Bank of England suggest a disorderly hard Brexit would affect house prices by up to 35%?

I mean it was only nine years ago we went through the global financial crisis with the credit crunch. Nationally, in most locations including Shetland, property values dropped in value by 16% to 19% over an 18-month period. Look at the graph and if we had a similar percentage drop, it would only take us back to the property value levels we were achieving in 2015.

And let’s not forget that the Bank of England introduced some measures to ensure we didn’t have another bubble in any future property market. One of the biggest factors of the 2009 property crash was the level of irresponsible lending by the banks. The Bank of England Mortgage Market Review of 2014 forced Banks to lend on how much borrowers had left after regular expenditure, rather than on their income. Income multipliers that were 8 or 9 times income pre-credit crunch were significantly curtailed (meaning a Bank could only offer a small number of residential mortgages above 4.5 times income), and that Banks had to assess whether the borrower could afford the mortgage if interest rates at the time of lending rose by three percentage points over the first five years of the loan … meaning all the major possible stumbling blocks have been mostly weeded out of the system.

So, what next?

A lot of Shetland homeowners might wait until 2019 to move, meaning less choice for buyers, especially in the desirable areas. For Shetland landlords, tenants are also likely to hang off moving until next year, although I suspect (as we had this on the run up to the 2015 General Election when it was thought Labour might get into Government), during the lull, there could be some buy to let bargains to be had from people having to move (Brexit or No Brexit) or the usual panic selling at times of uncertainty.

Brexit, No Brexit, Hard Brexit … in the whole scheme of things, it will be another footnote to history in a decade. We have survived the Oil Crisis, 20%+ Hyperinflation in the 1970’s, Mass Unemployment in the 1980s, Interest Rates of 15% in 1990’s, the Global Financial Crash in 2009 … whatever happens, happens. People still need houses and a roof over their head. If property values drop, it is only a paper drop in value … because you lose when you actually sell. Long term, we aren’t building enough homes, and so, as I always say, property is a long game no matter what happens – the property market will always come good.

Growth in UK property values as well as in Shetland seems fated to slow over the next five to ten years, whatever sort of Brexit takes place.

 

By David Arthur

 

What Will Happen to Shetland Property Values now Interest Rates have Risen?

The current average value of a property in Shetland currently stands at £139,900 and the base rate has risen from 0.50% to 0.75%. In many of my articles, I talk about what is happening to property values over the short term (i.e. the last 12 months or the last 5 years), but to answer this question we need to go back over 40 years, to 1975.

The average value of a Shetland property in 1975 was £6,773

However, since 1975, we have experienced in the UK, inflation of 807.5%.

Back in 1975, the average salary was £2,291 and average car was £1,840. A loaf of bread was 16p, milk was 28p a pint and a 2lb bag of sugar was 30p. Inflation has increased prices, so comparing like for like, we need to change these prices into today’s money. In real spending power terms, an average value of a Shetland house in 1975, expressed in terms of today’s prices is £61,471.

That means in real terms, property costs a lot more today, than in the mid 1970’s, but has it always been that way? Looking at the important dates of the UK property market, you can see from this table, the last two property boom years of 1989 and 2007, show that there was a significant uplift in the cost/value of property (when calculated in today’s prices).

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Before we move on, hold onto the thought that you can quite clearly see from the table, in real terms, properties are cheaper today in Shetland than they were in 2007!

So, it made me wonder if there was a link between house prices, inflation and other external economic factors, such as interest rates? Interest rates have a strong influence on inflation and property values, principally because changes in the interest rate affect the cost of mortgage payments for homeowners and they affect the flow of foreign currency in (or out) of an economy, thus changing the exchange rate and prices we can sell our goods and services abroad and prices we pay on imports.

So how exactly do interest rates affect property values?

When interest rates rise, it has a substantial effect on increasing the monthly cost of mortgages. Higher mortgage payments will discourage prospective homebuyers or people looking to move up market (meaning their mortgage payments go up) – thus making it comparatively cheaper to rent.

 

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Furthermore, the high cost of mortgage payments sometimes also pushes some existing home owners to sell, meaning there is an increase in house sellers and a decline in house purchasers, and as the law of economics state, when supply is increased and demand falls, (house) prices fall. Another fallout of a rise in mortgage payments is a rise in repossessions. Interestingly, repossessions in the UK rose from 15,000 per annum in the late 1980’s to over 75,000 per annum in the early 1990’s, meaning even more properties came onto the market, exasperating the issue of over supply – pushing property values even lower.

High interest rates caused property values to fall in mid 1970’s, early 1980’s and most recently, the early 1990’s (some will remember the 15% mortgage rate! I can’t!) Conversely though, the drop in property values in 2008/2009 – was not due to interest rates, but due to the credit crunch and global recession.

So, what will happen now that interest rates have risen?

It is vital to remember that interest rates are not the only factor affecting property values. It is also possible that now interest rates have increased (and it is likely they will increase further from the current 0.75%), property values can also continue to rise (it happened throughout the mid to late 1980’s and again between the boom years of 2002 and 2007). When confidence in the economy is good, and we as a Country experience a period of rising real incomes (i.e. after inflation), then the British in the past have continued to buy bricks and mortar, notwithstanding the rise in interest rates.

Another important factor on property values is the supply of housing. A big reason in the current level of Shetland house prices is due to the shortage of supply, which has kept property values higher than I would have expected. An additional factor is whether homeowners have a variable or fixed rate mortgage. 90.6% of new mortgages taken in the last Quarter were at a fixed rate, and 66.2% of all mortgaged homeowners are on fixed-rate mortgages, therefore, they will not notice the effects of higher interest rate payments until they re-mortgage in a few year’s time, meaning there is frequently a time-lag between higher interest rates and the effect on property values. Another factor on mortgages is the ability to get one in the first place. Back in 2014, mortgage providers were told to be stricter on their lending criteria when arranging mortgages following the footloose days of 125% loan to value mortgages with the Northern Rock.  These new rules are a lot more rigorous on borrowers’ ability to repay the payments (although it makes me laugh, when with starter homes it nearer is always cheaper to buy then rent!).

I think the final point is this … affordability is the key. Look at the graph (the red bars) and you will see in REAL HOUSE PRICE terms – it’s cheaper to buy a home today than it was in 2007, yet why aren’t we seeing people buying property at the levels we were seeing in the 2000’s before the credit crunch? Again, looking at the reasons why, I will talk about in future articles.

In conclusion, interest rates are important – but nowhere near as important on the Shetland (and British) property market than they were 15 or 20 years ago.

So, before I go, one final thought – how do we measure the success of the Shetland property market? Well I believe one measure that is a good bellwether is the number of property transactions, as that could show a more truthful picture of the health of the property market than property values. Maybe I should talk about that in an up and coming article?

Time to call it a day for Local Hoteliers

Marjorie Williamson and her husband Gordon have run the Herrislea House Hotel for the past 21 years, but now their minds are turning to the future.

The 9 bedroom property sits at the end of the idyllic Tingwall Valley, on the mainland of the Shetland Islands. It’s an area that’s surrounded by nature and history, but it also benefits from an influx of young families – attracted by its blend of rural life and proximity to the main town of Lerwick.

The guesthouse attracts visitors from all over the world, with great access to nearby golf courses, fishing lochs, and the other great outdoor activities that Shetland has to offer.

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Marjorie and Gordon bought Herrislea House in 1997. It was a burned out shell of a building at the time – following a fire – but after an 11 month refurbishment they transformed it in to the comfortable and cosy Country House that remains today. Gordon had no hotel or catering experience at the time – he says he’d never pulled a pint until the day that they opened! However the couple don’t regret taking the plunge, and are pleased with the reputation the Herrislea has acquired throughout their time in charge.

“It’s been a lot of good times” says Marjorie. “Of course, there are times when we’ve had to work hard – but during that time we’ve made a lot of friends that will be friends for life.”

The couple also run another business, operating supply boats, which saw them build and launch a 5th vessel in February. With increasing demands on their time, the Williamsons want to hand over the Herrislea House to someone new – with enough sense to see the various opportunities up for grabs.

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BK Marine’s new workboat – BK Marjorie

Gordon describes the guesthouse as “good to go” – with the current trade and reputation of the Herrislea ready to be passed on.

“It certainly has potential” he says. “It’s a fine central location, out in the county, and the tourist trade is improving all the time – we see as many tourists now as we’ve ever seen!”

The building is in an excellent state of repair – with 9 en-suite letting rooms, staff accommodation, plus a lounge and restaurant area. A brand new commercial kitchen presents a wide range of catering options – with the chance to revive the popular themed restaurant nights of the past.

There are so many new homes around the hotel, and young families staying in the area, that the potential now is much greater than it was says Marjorie.

In particular, the Williamsons are keen to hand their precious Herrislea over to someone with ideas and enthusiasm. In the heart of a growing and vibrant village – they think that a young family would be especially suited to taking on the hotel, and becoming part of the community here.

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“21 years is plenty for us” says Gordon. “I think we’ll move on and let someone that’s young and enthusiastic have a go at it. If we don’t concentrate on the one business, we’ll fall between them both.”

Marjorie also sees the popular online booking agent ‘Air BnB‘ as a great opportunity. The Herrislea House Hotel is already taking bookings via the website. 

“I see not only tourists, but also business trade using Air BnB more and more” she says. “I think that it would be ideal for someone with a family – and if they wanted to operate an Air BnB that would certainly be the easy way forward. I do see there’s huge potential in that.”

Gordon and Marjorie have had good times at Herrislea, with fond memories of the place and the people – both those who have been guests over the years, and the many staff who have supported them. This isn’t only the chance to buy their business but it’s a chance to buy their lifestyle as well.

If you’d like more information concerning the sale of Herrislea House please contact Estate Agents Arthur and Simpson by phoning 01595 747 045 or email property@arthurandsimpson.com.

Visit www.arthurandsimpson.com for the sales particulars.

You can also listen to an interview with Marjorie and Gordon,

 

and watch this online video.

 

77% More Shetland Home Owners Wanting to Move Than 12 Months Ago

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As I have mentioned a number times in my local property market blog, with not enough new-build properties being built in Shetland to keep up with demand for homes to live in (be that tenants or homebuyers), it’s good to know more Shetland home owners are putting their properties on to the market than a year ago.

In the middle of 2008 there were 11 properties for sale in Shetland but by August 2009, when the credit crunch was really beginning to bite, that number had risen to 23 properties on the market at a time when demand was at an all-time low, thus creating an imbalance in the local property market.

Basic economics dictates that if there is too much supply of something and demand is poor (which it was in the Credit Crunch years of 2008/9) … prices will drop. In fact, house prices dropped between 15% and 20% depending on the type of  property between the end of 2007 and Spring 2009.

However, over the last five years, we have seen a steady decrease in supply of properties coming onto the market for sale and steady demand, meaning Shetland property prices have remained robust. A stable housing market is one of the foundations of a successful British economy, as it’s all about getting the healthy balance of buyer demand with a good supply of properties. Nevertheless, if you had asked me a couple of years ago, I would have said we were beginning to see there was in fact NOT enough properties coming on to the market for sale … meaning in certain sectors of the property market house prices were overheating because of this lack of supply.

So, it is pleasing to note, looking at the recent numbers …

There are 77% more properties for sale in Shetland today than a year ago

There were 13 properties for sale 12 months ago, and today that stands at 23. Definitely a step in the right direction to a more stable property market.

 

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Even better news, since the Chancellor announced the stamp duty rule changes for first time buyers (FTB), my fellow agents in Shetland say that the number of FTB’s registering on the majority of agent’s books has increased year on year. That has still to follow through into more FTB’s buying their first home, however, with the heightened levels of confidence being demonstrated by both Shetland house sellers and potential house buyers, I do foresee the Shetland Property Market will show steady yet sustained improvement during the second half of 2018.

What does this mean for Shetland landlords or those considering dipping their toe into the buy to let market for the first time? Landlords will need to keep improving their properties to ensure they get the best tenants. It is true that demand amongst FTB’s is increasing, albeit from a low base. Even with the new landlord tax rules, buy to let in Shetland still looks a good investment, providing Shetland landlords with a good income at a time of low interest rates and a roller coaster stock market.

If you are thinking of investing in bricks and mortar in Shetland, it is important to do things correctly as making money won’t be as easy as it has been over the last twenty years. With a greater number of properties on the market .. comes greater choice. Don’t buy the first thing you see, buy with your head as well as your heart … and don’t forget the first rule of Buy To Let Investment …..

Written by

David Arthur

 

62 First Timer Buyers in Shetland Bought Their First Home in 2017

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A little bit of good news recently on the Shetland Property Market as recently released data shows that the number of first-time buyers taking out their first mortgage in 2017 increased more than in any other year since the global financial crisis in 2009. The data shows there were 62 first time buyers in Shetland, the largest number since 2006.

I expect this year that this increase of first-time buyers will level out and maybe dip slightly as, nationally, figures demonstrate that first time buyer’s average household income was £40,691 and this represented 17.3% of their take-home pay. Although, it might surprise readers that it is actually cheaper to buy than it is to rent at the ‘starter home’ end of the housing market. Many of you can remember mortgage rates at 12% … even 15%. Today, at the time of writing this article, I found on the open market, 189 first time buyer mortgages at 95% (meaning only a 5% deposit was required) with 3 year fixed rates from a reputable High Street bank at 2.49% … they even did a 3 year fixed rate 100% mortgage for 2.89%!

Interestingly, looking at the other end of the market, the buy-to-let investment in Shetland was subdued, with only 13 buy-to-let properties being purchased with a mortgage. However, I must stress, whilst there is no hard and fast data on the total numbers of landlords buying buy-to-let, as HM Treasury believes only 30% to 40% of buy-to-let property is bought with a mortgage. This means there would have been further cash only buy-to-let purchases in Shetland – it’s just that the data isn’t available at such a granular level.

In terms of the level of mortgage debt in Shetland, looking specifically at the ZE1 to ZE3 postcode, there hasn’t been much change in this over the last few years.

 

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This is pleasing to see, as new mortgage debt is created by first time buyers, buy-to-let landlords and home movers themselves, that is being roughly equalled by the amount being paid off with mature mortgaged homeowners in their 50’s and 60’s finally paying off their mortgage.

So, what does all this mean for the Shetland Market?  Well, the stats paint a picture, but they don’t inform us of the whole story. The upper end of the Shetland property market has been weighed down by the indecision around the Brexit negotiations and rise in stamp duty in 2014, when they made it considerably more expensive to buy a home at the higher end of the scale. The middle part of the Shetland property market has been affected by issues of mortgage affordability and lack of good properties to buy, as selling prices have reached the limit of what buyers can afford under existing mortgage regulations. The lower to middle property market was hit by tax changes for buy-to-let landlords, although this has been offset by the increase in first-time buyers.

If you are in the market and selling now and want to ensure you get your property sold, the bottom line is you have to be 100% realistic with your pricing from day one and you might not get as much as you did say a year ago (but the one you want to buy will be less – swings and roundabouts?). I know it’s not comfortable hearing that your home isn’t worth as much as you thought, but buyers are now unbelievably discerning. 

So, if you are thinking of selling your property in the coming months, don’t ask the agent out a few days before you want to put the property on the market, get them out now and ask them what you need to do to ensure you get maximum value in the shortest possible time. I will freely give that advice to you at no cost or commitment to you.

David Arthur

Shetland Property Market – Which Houses are Actually Selling?

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G7, Trump and Kim, Brexit, House prices up, House prices down … the press is full of column inches on Brit’s favourite subjects of politics, scandal, weather and not forgetting (and I appreciate the irony of this!) the property market. As an agent belonging a national group of letting and estate agents, talking to my fellow property professionals from around the UK, the one thing that is immediately apparent is the UK does not have one property market. It is a hodgepodge patchwork (almost like a fly’s eye) of lots of small property markets all performing in different ways.

… And that made me think … is there just one Shetland Property Market or many?

I like to keep an eye on the property market in Shetland on a daily basis because it enables me to give the best advice and opinion on what (or not) to buy in Shetland, be that a buy to let property for a landlord or an owner-occupier house for a homeowner.  So, I thought, how could I scientifically split the Shetland housing market into segments, so I could see which part of the market was performing the best and the worst.

I decided the best way was to split the Shetland property market into four equal size price bands (in terms of households for sale). Each price band would have around 25% of the property in Shetland Islands, from the lowest in value (the Lowest Quartile or 25%) all the way through to the highest 25% in terms of value, the Upper Quartile.  Looking at the market, I have calculated that these are the price bands in Shetland are as follows:

  • Lowest Quartile (lowest 25% in terms of value) … Up to £150,000
  • Lower/Middle Quartile (25% to 50% Quartile in terms of value) …  £150,000 to £210,000
  • Middle/Upper Quartile (50% to 75% Quartile in terms of value) … £210,000 to £270,000
  • Upper Quartile (highest 25% in terms of value) … £270,000 Upwards

So, having split the Shetland Islands Property Market approximately into four equal sizes, the results in terms what price band has sold (subject to contract or stc) the most is quite enlightening –

Shetland Islands  Available Sold STC % Sold
Up to £150,000 7 2 22.2%
£150,000 to £210,000 7 2 22.2%
£210,000 to £270,000 8 1 11.1%
£270,000 upwards 8 1 11.1%

The best performing price range in Shetland is the middle and lower market, meaning there are plenty of landlords buying properties to add to their buy to let portfolio. As I would expect, the upper end of the market is finding things tougher. Even though the number of first time buyers did increase in 2017, it was from a low base and the vast majority of 20 something’s cannot buy, so need a roof over their head (hence the need to rent somewhere).

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It is a fact that British (and Shetland) housing markets have ridden the storms of Oil crisis in the 1970’s, the 1980’s depression, Black Monday in the 1990’s, and latterly the Credit Crunch together with the various house price crashes of 1973, 1987 and 2008. No matter what happens to us, Brexit or anything else … unless the Government starts to build hundreds of thousands extra houses each year, demand will always outstrip supply … so maybe a time for landlord investors to bag a bargain?

Want to know where those Shetland buy to let bargains are?  Follow my Shetland Property Blog or drop me an email because irrespective of which agent you use, myself or any of the other excellent agents in Shetland, many local landlords ask me my thoughts, opinion and advice on what (and not) to buy locally … and I wouldn’t want you to miss out on those thoughts … would you?

David Arthur

Welcome!

Thanks for joining me!

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Hi, and thank you for visiting this blog.

I have been involved the Shetland Property scene for many years, first in the construction industry, then becoming a landlord and now owning and running Arthur and Simpson Estate Agents based in Lerwick. I have always shared my thoughts on the local property market in Shetland with fellow landlords and home owners but now I want to share with everyone.

On this blog, I will talk about what is happening in the property market itself, even looking at specific areas, streets or housing estates. At other times, I will post what I consider decent buy to let deals. Some will be on the market with me but others will be on the market with other agents in Shetland.

I like to look at the whole of the market and give you, what I consider the best investment opportunities. If you see a potential deal, and want a second opinion, without hesitation, email the link to property@arthurandsimpson.com and i will be happy to give my advice.

I will always give you my honest opinion on the property and its investment potential. (both good and bad).

Hope you enjoy the content!

David Arthur