Land Lines: The housing land market in Scotland

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The Scottish Land Commission has commissioned a series of independent discussion papers on key land reform issues.  The papers are intended to stimulate public debate and to inform the Commission’s longer term research priorities.  The opinions expressed are those of the author and do not necessarily reflect those of the Commission.

The first paper in the series, ‘The housing land market in Scotland: A discussion paper’ is looking at how the public sector could intervene to improve the operation of the land market and increase the supply of land for new housing.   A number of important questions have been posed to encourage the debate to continue.  We would welcome your views on the paper and you can get in touch by either contacting the Commission directly, through our blog or at one of our events.

Here is a guest blog from the author of the paper, Laurie Macfarlane:

Laurie

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.

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7 thoughts on “Land Lines: The housing land market in Scotland”

  1. This is a well argued blog and I hope the policy makers take notice. Civil unrest is most often bred is situations when a larger proportion of the population feel an injustice – unfortunately we are heading in this direction. There are many policy instruments and measures available and while I would not recommend a violent swing towards for example higher level of taxes for second homes or on ‘purchase to rent’ sales – the longer the situation persist the more extreme the measures will need to be to correct the situation.

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  2. Unfortunately the discussion paper misses/fails to tackle a number of points – including:

    1. The planning system’s role in the failure to deliver housing numbers is glossed over in favour of criticism of the current house building model with it argued that landowners sit back and wait and only sell when values are high. No evidence is led to support that landowners adopt such an approach, the author instead indulges in speculation.
    2. The paper offers no commentary on the interaction between the planning system and infrastructure requirements and the resulting ability to deliver new housing. Infrastructure in this context includes roads, drainage, schools, healthcare and recreational facilities. If housing is allocated to a site where significant investment is first needed in upgrading/new roads and this cost cannot be met from land value then development stalls. Development plans (SDPs and LDPs) must identify land that is capable of coming forward.
    3. The author gives the impression that no tax is paid on land value realised. Capital gains tax (currently 28%) is paid on the uplift in value from acquisition to sale. That can often be from a historic agricultural value to development value.

    It is recognised that the paper has been produced to stimulate discussion and that must be a good thing. What would be helpful as part of that discussion would be specific invitations to organisations/property professionals involved in housing development to respond to the paper. It must be important to understand what happens in real life.

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  3. Like Stuart Young I recognise that the paper is intended to generate discussion and debate but I share his concern that in doing so it is at risk of glossing over many of the complexities of the housing development market. Specifically;

    Demand – the market for new build is clearly intertwined with the market for second hand property. Whilst the paper acknowledges this, and makes suggestions for affecting that market as well, it does not address the financial consequences of the policies proposed. Any reduction in house prices would have very serious consequences for the finance sector, mortgage availability and ultimately mortgagees many of whom may be placed in negative equity.

    Planning – Local authorities are already charged with ensuring a generous housing supply. They face constraints in ensuring they identify deliverable sites and public acceptance of those allocations. The greater democratisation of the planning process in recent years (to be welcomed) adds both delays and sometimes successful resistance to development allocations.

    Infrastructure – the constraints faced in delivering housing are often very significant with road, rail, water, drainage and utility grid constraints. These often aren’t just local to sites but can be distant – especially with grid constraints. The disfunction of our infrastructure and utility system requires far more attention than the paper provided as it’s a huge issue.

    Geographic variability – the paper, perhaps not surprisingly, tended to select examples from more valuable markets such as Edinburgh. In many parts of regional Scotland the delivery of residential property is a more challenging task. We are currently delivering a new town near Inverness. I will happy engage with the author to demonstrate the financial (as well as logistical challenges) delivering a community involves – and one which is an exemplar under the Scottish Governments Sustainable Communities Initiative. We are also trying to market a site in Fife (ex coal fields area) and have been unable to find a buyer after 2 years of marketing. The economics of delivery in that area render the whole prospect financial unattractive. The paper fails to explore where the vacant land is in Scotland and whether it remains vacant because lack of demand and high costs of clean up / servicing render the land of negative value.

    The paper has a general sense that the conclusion – land is the problem – is drawn first with the rest of arguments draped around that. Perhaps understandable when being written for a “land” commission but falls risk to prescribing the wrong solutions and ones that have the great potential to massively restrict supply of land not increase it. Property owners (many of whom may have bought land for development or invested in promotion / planning etc) are not going to take kindly to releasing that land at very low values particularly if they sense such policies will be over turned in the future – as had happened historically.

    There are less dramatic models which may be of greater assistance particularly for larger strategic developments and new communities where the public sector assists with long term investment in exchange for long term returns as the scheme is developed. This may unlock many sites; reduce short term risk and see a return to the state as the scheme rolls out. A partnership approach which is less confrontational and likely to improve supply not constrain it.

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  4. Thank you for your comments. This paper was intended to stimulate discussion and we are pleased to see that it is working!

    We recently hosted a round table discussion based on the paper that involved representatives from the development industry. It was a really constructive meeting that touched on many of the issues you have raised in your comments. It also helped to highlight the complexity of the issues involved.

    The Land Commission fully recognises this complexity and the need to undertake further research before making any specific recommendations and we have either started or are about to start more detailed research on:

    – what lessons Scotland might be able to learn from historic attempts to capture the uplift in land values associated with development in the UK;
    – the potential of land value taxation to contribute to a more productive, accountable and diverse pattern of land ownership and use in Scotland;
    – the causes and consequences of urban vacancy and dereliction and what new policy tools might be required to address this; and
    – the constraints to land assembly for development and effective place-making and how more public interest led development could be encouraged;
    – the treatment of land within the current tax system and the extent to which this supports the public interest.

    We will continue to engage with relevant stakeholders and learn from this collective experience. As a starting point for this we have taken note of the issues you and others have raised and will reflect on these as we take forward our work programme. We are also encouraging people to engage face-to-face by attending one of our public events (details of which are on the website). You may also be interested to know that we are planning to host a conference covering many of the themes raised in the paper next April, further information will be available soon.

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  5. This is an important debate that needs to be resolved if the UK is to have a better chance of climbing out of the black hole we have been digging for ourselves. It is surely important to distinguish between different types of location in exploring both the potential for sharing the upiift in land values from development, and also the scope for raising charges from adjoining property owners who benefit from increased accessibility when infrastructure investment is made.

    As well as some articles in Town and Country Planning on the topic, such as the May issue where I contributed onb ‘location, location, location’ I have been leading a consultancy team for the GLA’s Deputy Mayor on Housing on international models of land assembly, which should be published next February. Hence I do hope the Scotland can show the rest of the UK a route map for resolving conflicts that have gone on for centuries!

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  6. The first thing to say is to bust the myth that private sector housing is becoming increasingly unaffordable. There are around 40,000 thousand of two bedroomed homes in every council area of Scotland for sale under £110,000 in 2017. Mortgages at 95% of property value are readily available and cheap. A joint income of £30,000 will easily Service such a mortgage. Most of the properties in this range invited offers below £90,000 so even single purchasers on s daily modest income should get s mortgage if his credit score is OK. Deposits in this range are not high.

    As the blog mentions there are a host of urban sites which have been fallow for generations. Most are owned by the public sector. The Scottish Government must introduce AGR charged per square metre per land type rate on all land . If the public sector was also liable to pay the AGR it would either develop it or release it to third parties to do so, both social and private sectors. When land ownership becomes a liability there is an imperative to change that. All the artificial policies to encourage house building are expensive to introduce and implement and never seem to resolve the issue.

    Make public sector land free to develop and the homes will be built. Have a planning brief for a combination of sites and just let the developers get on with it. If they don’t abide by the brief force them to demolish or pay a hefty penalty.

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