Blog: The housing land market in Scotland

Laurie Macfarlane

Laurie Macfarlane

Laurie Macfarlane, the author of a paper which looks at how the public sector could intervene to improve the operation of the land market and increase the supply of land for new housing, discusses his findings.

Between 1995 and 2015 the share of income spent on housing costs in Scotland increased by 50%, from 12% to 18%, the second sharpest increase of any UK region outside London. Levels of homeownership have been falling for a decade – particularly among young people. There are nearly 150,000 people on the waiting lists for social housing, while the government spends nearly £2 billion a year helping those who cannot afford to pay their rent.

It’s clear that Scotland is in the grip of a housing crisis. But how did we get here, and what can policymakers do to fix it?

Scotland’s housing crisis is complex, but at the heart of it lies a dysfunctional land market. House prices have increased dramatically across Scotland in recent decades, but it is not the bricks and mortar that have become more valuable – it is the land underneath.

Rapidly rising land prices are not an inherent feature of advanced economies. Instead, the way the land market operates depends largely on the laws, institutions and political history of particular nations. In Scotland, the housing land market is characterised by a number of distinct features, including:

  • a reliance on the private sector operating on a speculative model to deliver new house building, which makes it inherently difficult to deliver a step change in the number of homes being built;
  • a legal framework that allocates the uplift in the value of land resulting from planning permission to landowners, rather than public authorities;
  • a liberalised mortgage credit market which has seen a relatively elastic supply of credit interact with a fixed supply of land, pushing up house prices;
  • a taxation system that is highly favourable to land and property, which has helped to fuel demand for housing and land as a desirable financial asset; and
  • a paucity of publicly available information on land values and ownership, which has made it difficult for policymakers and market participants to make informed decisions.

As house prices have continued to increase, the gap between house prices and earnings has grown larger. For those who own property, this has generated an untaxed windfall which has increased net wealth. But for those who don’t own property, the cost of homeownership has become increasingly prohibitive. Many households have found themselves with little choice but to rent privately. For these households, escalating rents have constrained living standards, reducing the amount of money that people have to spend on other goods and services. The result is a growing gap between those who own property, and those who do not.

The availability of high returns from investing in existing land and property assets has diverted investment from more productive areas, harming productivity growth and output. At the same time, there are over 2,000 hectares of vacant urban land, and over 10,000 hectares of derelict land across Scotland – much of which has remained in the same state for decades.

Without bold action, the pressures of population growth and demographic changes will only add to Scotland’s housing problems. Policy options to improve the operation of the land market include public land value capture, compulsory sale orders, a new housing land development agency, tax reform, and greater market transparency.

As well has helping to meet Scotland’s housing needs, intervening to improve the functioning of Scotland’s land market can help generate a number of long-term benefits for Scotland’s economy, including a more productive and dynamic economy; a fairer and more inclusive society; improved living standards and healthier public finances.

  • Laurie Macfarlane is an economist and writer based in Edinburgh. He is currently Economics Editor at global media platform openDemocracy.