Only a few weeks ago it seemed that the No campaign would be victorious in the Scottish referendum on 18 September. However, two live TV debates later we see the polls showing opinion divided with a 50-50 split between Yes voters and No voters. This has impacted the financial markets and there are growing signs that the Scottish property market is beginning to tighten as investors consider the risks and the unknown in the event of a Yes vote.
There are many different factors to take into consideration, many unanswered questions and serious concerns about the future of an independent Scotland with regards to the property market, currency, banking costs and the economy.
Investors inserting independence clauses
We have seen one interesting development over the last few days, the confirmation that investors looking towards Scottish property and real estate are demanding independence clauses which would give them the opportunity to walk away in the event of a Yes vote. Evidence seems to suggest there has been a gradual buildup of these clauses in the weeks and months ahead of the referendum vote and they are now reaching a crescendo.
There are many reasons why these clauses are appearing which include: –
The Scottish real estate market is enormous with Edinburgh attracting the lion’s share of overseas investment. The fact that the Yes campaign, dominated by the SNP party, cannot even at this stage say with any confidence what the currency situation would be in an independent Scotland has spooked many investors. As Westminster political parties queue up to refuse the SNP’s idea of a currency union there is a growing consensus that using sterling outside of a currency union is the infamous “Plan B”.
Quote from PropertyForum.com: “Is commercial property at risk if Scotland goes independent?“
A variety of worldwide banking institutions with exposure to the UK, and in particular Scotland, have been very vocal over the last few days suggesting that an independent Scotland would see increased banking costs which would be passed on to customers. It is inconceivable that in this scenario mortgage rates would remain at current levels as additional costs, uncertainty and a perceived greater risk would push Scottish mortgage rates higher in the future.
The greater the cost of finance, especially in the real estate market, the higher the risk reward ratio which will lead to a reduction in short to medium term transaction numbers. Less demand will lead to softer house prices and, amid rumours that many living and working in Scotland are now switching their funds from Scottish banks to English-based banks, we could see a serious knock-on effect.
Sentiment dominated by uncertainty
The fact that the Yes campaign, under the guise of Alex Salmond and his SNP party, cannot even confirm the currency arrangements of an independent Scotland has caused massive uncertainty in the financial markets. He has threatened to walk away from Scotland share of UK debt, he is demanding a currency union which is incompatible with an independent Scotland and this will most certainly lead to greater lending costs for an independent Scotland – which would effectively have defaulted on debt before even opening the doors of independence.
Financial markets are able to calculate the risk reward ratio of any transaction once they know the individual components. The fact that such vital questions as what currency an independent Scotland would use have yet to be answered is one of the main reasons for the ongoing financial volatility and uncertainty. The SNP is determined to push through a currency union with the rest of the UK in the event of independence although all rUK political parties, the Bank of England and indeed UK taxpayers will ensure this does not happen.
So, with Scotland on the verge of a potential move away from the Union there are still far too many questions remaining unanswered and this is, and will continue to, impacting the Scottish real estate market.