Scotland Independence House Prices Crash, Deflationary Debt Death Spiral

By: Nadeem_Walayat

The consequences for the people of Scotland voting YES would be tantamount to the Scottish people firstly committing economic suicide as a consequence of the immense uncertainty in virtually every aspect of economic activity that would expect to manifest it self in dis-investment / flight of capital out of Scotland, from funds held in the banks deemed to be Scottish, to sale of a whole host of business and private assets such as properties as for many Scottish households the safest place to be at such an uncertain time would be to move into rental premises, even to the extent of a panic swapping of Scottish paper Pound notes for English paper Pound notes, just in case of volatility in the relative value of the notes by the market (shops).

For most ordinary people the home one owns is the most valuable asset that they are likely to own during their life time, and thus the ramifications of Scotland voting YES will immediately turn to protecting the value of that asset in the face of immense uncertainty from financial (currency and banking) to economic (investment and jobs) to Political (Uncertainty over Debt and Sovereignty) to Social (Fragmentation of Scotland as regions seek to become independant of Edinburgh or even rejoin the UK).

Where the Scottish housing market is concerned the key drivers will be uncertainty over monetary value i.e. at this point in time the house you own is valued in British Pounds (BP) Sterling which is based on UK interest rates, economy, inflation and the Bank of England as Lender of Last Resort. None of these would be true IMMEDIATLY following independence, where even if the negotiations may take upto 2 years it should not be forgotten that markets DISCOUNT the FUTURE. They do not wait for politicians to act but rather the SENTIMENT adjustment is near IMMEDIATE, within just a few weeks of a YES vote, which then feeds momentum into a downward spiral for the news in terms of Scottish house prices WILL be VERY BAD due to the points concerning flight of capital and uncertainty that will likely result in a CRASH in Scottish house prices.

Scottish House Prices Already Discounting Uncertainty

Whilst London has led Britain's house price boom by literally soaring into stratosphere to new all time highs that has prompted many to conclude (such as Scottish Nationalists) that Britain's housing bull market is just limited to London. However, the reality is that virtually every region of Britain having been in an accelerating bull market since at least Mid 2013, all except Scotland which has been stagnating now for a year all as a consequence of the uncertainty of a YES vote. Scotland's housing market has effectively been frozen as many prospective buyers out of fear have put off their decision to buy whilst at the same time supply exceeds demand thus keeping Scottish house prices depressed despite UK average house price inflation rising to 10% per annum.

Therefore there are two outcomes for Scotland's house prices going forward -

NO VOTE

Expect a STRONG rebound in Scottish house prices as uncertainty of a YES vote evaporates as Scottish house prices play catch up to the national average. So I would not be surprised if we see an exceptionally large jump in quarterly Scottish house prices that will result in many mainstream headlines such as Scotland's House Prices Boom Following NO Vote.

In fact, in all probability sellers / estate agents will mark asking prices higher AHEAD of a probable YES vote i.e. discounting future demand following a NO vote which means that we could see a sharp quarterly rise in Scottish prices BEFORE the September 18th Vote. Yes the way markets behave can be confusing, but just remember that markets discount the future.

YES VOTE

CRASH! - How far could Scottish house prices crash following a YES vote is difficult to say, it depends on how the other consequences of what I have briefly outlined above will play out such as the fragmentation of the borders of Scotland. However, I would not be surprised if Scottish house prices stand 15% lower in British Pound sterling terms a year after the Independence vote. This whilst the debt burden (mortgages) will have increased as a consequence of HIGHER interest rates, effectively Scotland entering into a deflationary debt death spiral as house prices fall the debt burden increases that prompts most Scottish households to cut back on consumption resulting in a worsening economic and financial position for the Scottish economy as Scotland's government seeks to increase deficit spending (money printing) in an attempt to fill the void which causes a further drop in house house prices in BP's.

Worse still is if Scotland has not sorted out a currency by then which would effectively result in a DEATHLY FREEZE of the Scottish economy as the Scottish Government would not be able to finance its growing budget deficit as it would literally have NO MONEY! For if Scotland cannot print then it MUST borrow British Pounds at ever higher spiraling interest rates.

Where is Scotland going to get the money to finance its growing budget deficit ? From YOU - Scottish home owners, that's where!

Expect home ownership taxes to soar, as the socialist SNP government favours vested interest voters over the near 50% of mostly home owners who would have voted NO.

In this death spiral, I would not be surprised if Scottish interest rates spiked to above 10%, and then what for Scottish house prices? Fast forward 3 years and we could see Scottish house prices 50% LOWER! in BP terms, followed by a depression that lasts decades.

The bottom line is that Scotland's housing market stagnation is but a mirror image of economic and business investment stagnation taking place, all as a consequence of the impending independence referendum following which we will find out whether Scotland is going to Boom (NO) or Collapse (YES). Therefore this will not be a question of Scotland being hit by a black swan but a bright flashing WHITE SWAN!

In all probability Scotland will vote NO which implies a boom is probable.

UK House Prices Forecast Brief

The updated halifax average house prices (NSA) graph to July 2014 of £189,726 is set against the forecast index level for July 2014 of £188,244 which illustrates that house prices over the past 7 months have shown <1% deviation from the forecast trend and therefore the long-term trend forecast remains on track to achieve a 55% rise in average house prices by the end of 2018.

My article of June 2014 concluded that house prices momentum was expected to continue to accelerate over the summer months and therefore to result in a slightly above trend forecast trajectory which is coming to pass with UK house prices not expected to deviate much further beyond +1% from forecast before converging towards trend forecast as I continue to expect UK house prices to OSCILATE around the forecast trend, and implying a slowdown towards trend -1%.

Source and comments: http://www.marketoracle.co.uk/Article47129.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2014 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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