First-time Buyers

While these increases in value will no doubt benefit those homeowners in later life, when retirement is on the cards and assets are liquidated to fund a good quality of life, the current state of the market means people wishing to purchase for the first time are in an extremely difficult position.

Entering the housing real estate market in Scotland is harder now than ever, and at present the number of first time buyers in Scotland is at its lowest for almost twenty years. According to the Bank of Scotland, the average house price paid by first time buyers in 2007 is more than double that paid in 2002, and between 2006 and 2007 alone prices increased by 13%. The average at the end of 2007 stands at £123,213. Even terraced housing, traditionally the most affordable type of property, has become too expensive for first time buyers in 60% of Scotland's towns. Compare this with 2002, when Edinburgh was the only town or city in Scotland where terraced property was out of the reach of first time buyers.

Data source: Halifax

Is Scotland's Property Market Slowing?

Late 2007 saw a 1.1% downturn in the average house price in the UK, the largest fall since 1996 and the first sustained fall throughout a quarter since 1995. The Bank of Scotland forecasts Scottish house price increases will fall in 2008 to 4%, down from the estimated 10% of 2007.

The global 'credit crunch' and the crisis in the United States sub-prime mortgage market mean lenders are being much more cautious about who they lend to. The result is that October 2007 saw the lowest number of mortgage approvals since February 2005. The reduction in December 2007 of UK interest rates from 5.75% to 5.5% by the Bank of England has further contributed to the cooling of the property market.

Despite these factors, the Bank of Scotland forecasts that the prevailing economic conditions in Scotland will maintain the property market. The expected record levels of employment in 2008 along with Scotland's house price to earnings ratio, which at 4.7 is well below the UK average of 6.0, Scotland is likely to remain an attractive and relatively affordable place to buy property in the near future.

The "Credit Crunch" and Sub-prime Mortgage Crisis

What started in 2006 as the US sub-prime mortgage crisis has widened to affect money markets globally. Simply put, the crisis stems from banks lending to financially unsound borrowers ('sub-prime' borrowers) with poor credit ratings. These 'bad debts', whose repayment is uncertain, are sold between banking institutions and invested in pension and hedge funds. Problem arises when those bad debts become so entrenched in the system that they cannot be identified, and thus banks are very reluctant to lend to one another for fear that they will receive debts which ultimately will not be paid off. Defaults on those loans by sub-prime borrowers leave the lending institutes exposed and wary of lending further. This tension between banks also affects investors, who are doubly reluctant to invest money in banking institutions during a period of uncertainty. Lack of investment means banks have less money to lend, and the cycle of lenders' caution continues.

An animation demonstrating the crisis can be found on FT.com.