Are Homeowners in Scotland Betting the House on Scottish Independence?

Panic stations as more and more economists warn of financial meltdown and a housing market crash in the event of Scottish independence.

The date of the referendum on Scottish independence has been known for some time. However, until very recently, unless you were distinctly interested in politics you would be forgiven for not having known, or either heard much about the debate.

But now, following a poll by YouGov that was published in The Sunday Times a week ago, the debate has distinctly intensified. The poll showed that, for the first time since the debate began, the Yes vote had edged ahead in public opinion.

All of a sudden, everyone outside the Yes campaign began to wake up to the fact that, in a few days time, Scotland may very well vote to dissolve the Union and leave the United Kingdom.

Those involved in the No campaign have been criticised for focusing on the negative aspects of separation rather than the positive things that are to be gained from keeping Britain united. Now, as the date of the referendum on Scottish independence grows ever nearer, it seems that every day brings new warnings about the economic fallout that a Yes vote would herald.

Alex Salmond and other leaders and supporters of the Yes campaign have dismissed the economic warnings of the No campaign as nothing more than scaremongering. However, more and more economists, business leaders and market experts have come forward and cautioned about the direness of the consequences if Scotland decides to vote for independence.

The respected city analysts, Credit Suisse, warned last week that, unless the Bank of England guarantees the savings of investors north of the border, there will be a rush on Scottish banks, as savers seek to pull their money out of financial institutions they will view as on the brink of economic meltdown. Andrew Garthwaite of Credit Suisse says “in our opinion Scotland would fall into a deep recession.”

Mr Garthwaite also went on to predict a ‘large-scale deposit flight’ and stated that he believed wages would fall by around 20%, even if Scotland kept the pound.

Scottish estate agents have said that literally millions of pounds worth of house sales are waiting to see which way the vote will go. They have also warned that there will be severe consequences for homeowners and potential house buyers if Scotland votes to leave the Union.

Mark Coulter, of Edinburgh based estate agents Coulters, said:

“Since August we’ve been getting noticeably far fewer calls and enquiries. You could have a flood of properties for sale as people jump ship to England. We’re acting on behalf of people who have said they will pull out in the event of a Yes vote. They will be buying another property, and another deal will fall through.”

Also, Nomura, the largest bank in Japan, has already advised its clients to pull their money out of the UK until after the referendum. Nomura has predicted that Sterling could drop by up to 15% if the Scots decide to leave the Union.

And the negative fiscal portends don’t end there.

Large banks, including Lloyds TSB and Royal Bank of Scotland, as well as financial giant Standard Life and other huge companies like BP and Shell, have also signalled that they intend to relocate their business headquarters south of the border if the Scots vote for independence on Thursday.

Citi Analyst Michael Saunders says a Yes vote will ‘hit growth in both Scotland and the rest of the UK’. Mr Saunders said:

“A Yes vote would create considerable economic and political uncertainty for the UK, which would not fade quickly.”

Also, several investors in both residential and commercial property in Scotland have recently been insisting on the inclusion of get out clauses in new contracts, which allow for the possibility of removing themselves from the contracts in the event of a Yes vote. So what does all this mean for the housing market in Scotland? Well, the answer is, no one is exactly certain.

The problem is that there are so many unanswered questions, especially in relation to the currency that a newly independent Scotland would use, that it is difficult to make hard and fast predictions. There are a number of what ifs. The main cause of concern for Scottish homeowners is that, according to the opinions of most experts, none of the what ifs seem to have happy endings.

The first possible scenario is that, either now or when independence is fully affected in eighteen months time, Scotland creates an entirely new currency. While there are advantages to this possibility, most notably that the Scots would have complete control over their own financial affairs, there are so many problems associated with the creation of a new currency that it is difficult to see it succeeding.

How would having an entirely new monetary unit affect existing homeowners in Scotland whose mortgage is already denominated in sterling? Would new Scottish home buyers be able to secure loans from lenders in England for future home purchases? If the major banks relocate, will there be a sufficient amount of lenders available in Scotland?

Dave Hollingworth, of mortgage brokers London & County Mortgages, said:

“Terms and Conditions of a mortgage loan would be likely to remain the same but, if the loan payments are taken in sterling, then suddenly the borrower has a major conversion issue if they’re suddenly being paid in a new Scottish currency, they would not only be subject to interest loan fluctuations but also exchange rate volatility.”

Hollingworth went on to say:

“For new homebuyers, you may find that some lenders just won’t offer mortgages in Scotland anymore. There is a high chance that smaller lenders would review their position in an independent Scotland.”

At present, there seems to be a situation whereby all possible scenarios remain hypothetical because we do not know exactly what is going to happen. There are however certain historical examples that allow us to make relatively dependable predictions about what is going to happen. As much as Alex Salmond denies it, if the dissolution of Czechoslovakia is anything to go by, then there will be a rush on Scottish banks if the Scots vote to leave the United Kingdom. Similarly, if Scotland ends up creating their own currency, as Slovakia was forced to do two years after agreeing to a monetary union with their Czech neighbours, then it will be extremely bad news for Scottish homeowners.

If Scotland were to create a new currency then people with existing mortgages denominated in sterling would see their payments mushroom. The new currency would have to be floated on the international money markets and Scotland would have to accept high foreign currency exchange rates due to the perceived risk posed by an independent Scottish economy. Common financial opinion, as well as the little amount of historical precedence we have available to us, makes it relatively clear that a new Scottish currency would immediately depreciate by around 10% against the pound. According to many market experts, even this scenario is somewhat optimistic. For the sake of argument, because there is more opinion supporting this figure than any other, if not just for the simplistic nature of the mathematics involved, let’s say that a new Scottish currency would depreciate by exactly 10% as soon as it was floated. This would mean that a homeowner with a mortgage of £1,000 a month would instantly see their mortgage become £100 more expensive overnight. Given these figures, it is no wonder many Scottish homeowners are concerned about the result of Thursday’s vote.

One of Alex Salmond’s main counterpoints to the naysayers who warn of problems in the Scottish economy is that international investors will be queuing up to pump money into a newly independent Scotland. However, when it comes to the housing market, in particular, this simply isn’t the case.

Karria Scott-Daniels, Chief Executive of Manse & Garret, which specialises in country estates and deals primarily with overseas investors, said:

“We have noticed a big slow down in appetite from overseas investment buyers, second home owners and buy-to-let landlords based outside Scotland.”

She went on to say that:

“People have always been worried about Alex Salmond penalising second homeowners. It could take ten to twenty years to make any kind of recovery and the recovery will be much less secure if the Republic of Ireland is anything to go by.”

In terms of Scottish house prices themselves, it seems the situation would be even bleaker if Scotland were to gain independence on Thursday. There are very few housing market experts who see the recent appreciation of house value inflation continuing in a newly independent Scotland, yet there are countless analysts who are warning of a veritable housing market crash north of the border if the Yes vote proves victorious.

Chief Executive of e.move, Russell Quirk says “house prices in Scotland have increased quickly in recent months but these highs could be a thing of the past if the Yes vote is confirmed. Property value is likely to see a sharp decline as there is plenty of uncertainty for the standalone economy. One of the first things to suffer will be jobs, which means home repossessions and a downward pressure and as a consequence, the result for house prices north of the border is potentially catastrophic. The average house price in Scotland is £160,000. A 20% drop in values, which we could easily see, would mean £32,000 less on the typical house price. Given that the Scottish market has not recovered to its 2007 peak levels, we could see mass negative equity and severe hardship.”

Then, of course, there are the myriad anomalies that would have to be worked through in the event of a Yes vote.

One particularly messy question revolves around the Help to Buy scheme. Help to Buy is a policy of the British coalition government. Therefore, it would no longer exist in a newly independent Scotland. Forget for a second that, according to many experts, it was the very existence of Help to Buy that gave a shot in the arm to a flailing national housing market and allowed for the general recovery we have witnessed over the past year. Homeowners who have already bought houses under the scheme would find themselves in the extraordinary position of owing a foreign government a substantial percentage of the value of their home. Not only is there no significant precedent for such a situation, but at the moment there does not seem to be anyone in any political party or financial institution with any plausible idea of how to account for such an anomaly.

And Help to Buy is only the tip of the iceberg. Even if Scotland were to retain the pound, which seems the most likely scenario, the implications are far less than simple. Scotland has two options available if they decide to keep the pound.

The first is an official monetary union with the other constituent countries that comprise the United Kingdom. In this scenario, Scotland would have a slight influence over fiscal policy as dictated by Westminster and the Bank of England, but not much. However, if the Governor of the Bank of England Mark Carney, Ed Milliband, Nick Clegg, the Prime Minister David Cameron, every MP in the Better Campaign and a host of financial experts are to be believed then an official union of this kind is highly unlikely to come about.

The second option available to the Scots if they decide to keep the pound is to do so unofficially without the agreement of Westminster. In this scenario, the Scots would simply carry on using the pound in the same way Panama uses the US dollar as its monetary unit without official permission from the United States. A newly independent Scotland would be perfectly within their rights to do this. However, if they were to do so, Scotland would have available no influence whatsoever over anything to do with the currency, especially in terms of fiscal policy.

So how would either of these scenarios affect the Scottish housing market? Well, again, it is difficult to be sure, primarily because there are so many unanswered questions. One of the principal questions that arise is how on Earth would banks account for defaults on Sterling based home and personal loans North of the Border? The fact is, nobody knows.

Another major question is who would regulate lending and other financial interactions in a newly independent Scotland? The FCA currently regulates the market in the United Kingdom but an entirely new body would have to be inaugurated in Scotland after independence. As yet, the ins and outs, or even the name of such an organisation, has yet to be spoken of by those campaigning for Scottish independence.

The final option available to Scottish fiscal policymakers is joining the Euro. However, this scenario is a lot less simple than it first appears. On average, the nations that currently use the Euro as their officially sanctioned monetary unit took 8 years to ready themselves to meet the criteria that must be satisfied before they were eligible to enter the European currency union. Scotland would be no exception. The scenario put forward by some independence campaigners, in which Scotland would walk into the EU, let alone the Euro, is, at best, misleading. What currency would Scotland use in the interim years in which they were adjusting their economy and readying themselves for the Euro? Most people say the pound. However, if Scotland were using a currency over which control was exercised by a foreign financial institution, in this case, the Bank of England, then they would not be eligible for inclusion in the EU, let alone the Euro. A situation whereby Scotland created a new currency to be used while it readied itself to join the Euro is even more unlikely and fraught with potential pitfalls and problems.

Whichever currency option Scotland chooses, the future is full of uncertainty. The major problem for those advocating the advantages of a Yes vote is that there is nothing financial markets like less than uncertainty. Last Monday, following the results of the YouGov poll in The Sunday Times, the pound dropped by 1% against the dollar. While this does not sound a lot, the fact is that in international monetary terms 1% is a huge daily drop. Furthermore, Scottish based companies took an absolute battering in the stock market, witnessing £2,000,000,000 worth of share value wiped out in a single day. If that is how the markets reacted when one opinion poll gave the Yes campaign a one point lead, then one can only imagine how dire the financial consequences would be if Scotland were to vote for independence on Thursday. The uncertainty would increase exponentially, and the volatile financial markets would react accordingly.

In the midst of all this uncertainty, one of the things of which Scottish homeowners can be certain, offers very little consolation. If the Bank of England were to decide to raise the rate of interest, which, given that the base rate has been at an uncommonly low 0.5% for a record 5 years, is more a case of when than if, then the cost of servicing mortgage debt would rise irrespective of any new economic conditions North of the Border. That is, Scottish homeowners would find their mortgage suddenly became more expensive no matter which of the two ‘keep the pound’ scenarios Scotland decided to implement. In fact, for homeowners whose mortgages are already denominated in sterling, a rise in interest rates would affect their mortgage payments even if Scotland created a new currency and, consequently, a new Central Bank. The same is true if they were to join the Euro.

However, in terms of the entire campaign and the consequences of a vote for Scottish independence on Thursday, there is one, even more, certain fact that no one can deny. If Scotland votes to leave the Union, the ramifications will be permanent, widespread and irrevocable. The Yes campaigners will say that is a good thing. Unsurprisingly, the No campaigners will say the opposite. Either way, it seems Scottish homeowners are literally betting the house on the outcome of this Thursday’s vote.