Solicitors Say Scots Property Market Is Insulated From Downturn

Submitted by edg on Sat, 10 May '08 8.23am

These may be nervous times for anyone trying to sell a house, with properties that a year ago would have had multiple offers getting little interest now, but our unique property-buying system should protect us from the woes affecting the rest of the UK property market.

At least, that's the view of a group of five solicitor firms, the Edinburgh and Lothians Property Group, who believe that the Scottish "missives" system insulates us from the problems currently being experienced in England where prices have fallen so much that the spectre of negative equity is looming heavily over many homeowners.

ELPG member Steve Spence, Senior Partner with Neilsons Solicitors, stresses that the Scottish and English markets are two separate entities and that fundamental principles affecting one don't apply to the other - particularly with regard to the dreaded "property chains".

He said: "During the last property slump in 1989-1993, prices went through the floor in England but in Scotland they merely plateaued - staying the same and even in some cases showing a slight increase.

"The reason for this is the Missive system which underpins Scottish property transactions.

"In Scotland, house-buying is governed by individual contracts which are not directly linked to any other transactions. An offer is submitted with a long entry date, several weeks ahead, and the purchasers are expected to conclude Missives right at the start on the basis that they will get their mortgage through before the entry date and sell their property with an entry date which hopefully corresponds.

"It means that in Scotland we have individual transactions that are completely insulated from any other transaction. If one sale breaks down, only that one transaction is affected.

"In England, the system is completely different. When an offer is made, the deal is "subject to contract". The contract is conditional on a number of factors falling into place - the sale of the purchaser's property and the arrangement of the mortgage being two key factors.

"The deal will be agreed but the contract will not be finally signed and exchanged until all the financial and practical ‘ducks' are in a row.

"Transactions, therefore, are inter-dependant and long ‘property chains' can develop often as much as 10 or 12 properties long. Only when each and every party in the chain is ready to go does the chain of transactions progress, the first time buyer pays for his property and so on along the chain.

"So if the first time buyer's expected 100% mortgage fails to materialise, as is being experienced now because of the credit crunch, it is possible for 10 or 12 transactions to fall flat on their faces overnight. That creates unimaginable turmoil and instability in the market place. Panic reigns and prices are reduced to try to get property deals resurrected.

"The best analogy is that of a string of pearls. If the pearls are strung on one string and the string breaks, all the pearls fall off. If the pearl are strung up individually, only one will fall."

Spence added the Scottish system creates stability, allowing people to buy and sell with confidence - a key factor when there is uncertainty in the market.

He said: "Commentators have expressed surprise that the English market is on a downward slide while Scotland is bucking the trend - with prices holding up in a remarkably robust manner and even showing modest increases in some areas.

"This is because we have a different legal system - our transactions are insulated from each other; our contracts are set up unconditionally at a much earlier stage and we don't have the "subject to contract " chains which develop in England. In addition, in Scotland we do not have the regular peaks and troughs experienced in the English market."

Statistics for the period January to March 2008 show evidence of this, with the ELPG members actually selling more houses compared with the same period in 2007 - 802 compared to 787. One ELPG member is reporting a sales surge of 22% year-on-year.

In addition, the ELPG group also saw a huge increase in the numbers of people putting their houses on the market - 1243 in Jan-Mar 08 against 1089 in 2007 - suggesting confidence remains high among homeowners and highlighting again how the local market is remaining resilient regardless of what is happening in England.

On the other hand, in past property cycles, Edinburgh has often experienced a delayed reaction to fortunes South of the border. While our unique system may provide some insulation, no market is immune from the laws of supply and demand, nor the ebb and flow of enthusiasm for bricks and mortar.