The land of Scotland and the common good: report

Section 21 - New Housing

1 The foreword to the Scottish Government's housing strategy states " Scotland needs many more new houses and to significantly enhance the quality and sustainability of our existing housing stock and neighbourhoods ... we need to find ways to achieve this, despite the additional major challenges stemming from the credit crunch and the UK Government's cuts to public spending. That is why we are setting out a radical agenda with profound implications about the way we think about housing ...." ^[1]

2 This Strategy and Action Plan for Housing is a bold and ambitious policy document which straddles the full range of housing issues and challenges, including the need to significantly increase the supply of new houses being built. In addressing this particular objective, it refers to " following through our recent reforms to the planning system to ensure a generous supply of land for housing", as one of a number of measures which will deliver the required number of houses. The Group questions whether this policy document sufficiently recognises the centrality of land supply to meeting new house building targets, and whether the planning system on its own has the necessary wherewithal to make sufficient land available for housing.

3 Within those responses to the LRRG's Call for Evidence which touched on housing, there was a significant degree of consensus around the nature of the land aspect of housing development. It was generally seen as a three dimensional problem: accessing land (how land is made or becomes available for housing); the price of land for housing development; and the operation of the planning system (which tends to work in a reactive manner, rather than perform a more proactive, enabling role). It was pointed out that it is how these three aspects of land supply interact together which creates the land supply problem for new housebuilding.

4 There is much literature on the extent to which the supply of land for housing is constrained or otherwise by restrictive planning policies and this is an area which has generated considerable debate among housing economists. A very good review of the evidence around land constraint issues is found within the recent article by Glen Bramley. ^[2] Whatever conclusion one arrives at however, it seems important that the public sector should not merely restrict housing development where it is considered inappropriate, but take pro-active steps to ensure the actual development of land where it is required.

5 To fully understand the relationship between land supply and housing supply, it is instructive to reflect on how this has developed historically. Wiles is one of a number of UK commentators who has pointed out how the value of land, as a percentage of house prices, has rocketed. ^[3] Back in the thirties, land could cost as little as 2% of the sale price of a house - today the land component of a new house can be as high as 70%. This leads Wiles to conclude that land, or the lack of it, is the single most important issue in housing today, and a major contributor to the fact that the UK is building some of the smallest houses in Europe.

6 Green points out that in constructing analyses of this nature you can only ever get crude pointers to trends. ^[4] In doing so he supports Wiles' observation that the price of land can now account for up to 70% of new house prices. Green also looks at house prices as a percentage of income. As an illustration, Fig. 19 shows how in the 1930's, an average builder could buy a house for between 3 and 4 times their annual salary. By 2010 it would take a builder 7.5 times their salary (and in reality the house being bought would probably be smaller with less of a garden).

7 The observations of Wiles and Green chime with a new report from Shelter which argues that addressing the land issue is the only way to properly close the current housing supply gap. ^[5] This report concludes that the land market is at the heart of the housing development industry: therefore improving its ability to provide land for development at reasonable volumes and prices is the greatest challenge facing housing supply policy today. They go on to point out that public policy levers in this area have largely fallen into disuse, leaving land supply at the mercy of an opaque market and an unresponsive planning system.

8 A recent major international review of land supply and planning systems, conducted by the Cambridge Centre for Housing and Planning Research, found that those countries which have demonstrated greatest success in housing delivery are much more proactive in the land and development market than the UK. ^[6] The authors conclude that a new approach to acquiring and releasing land is required, as are new development vehicles, able to deliver housing at scale. The study also stresses the need to allow new, smaller actors the opportunity to build.

9 While much of this research and commentary refers to the operation of the general housing market, Gibb and O'Sullivan conducted a study of social housing development costs in Scotland. ^[7] They found that the evidence supports the conclusion that the single most important factor in escalating social housing development costs in Scotland has been land price increases, particularly since 2002. Gibb and O'Sullivan found that residential land prices in Scotland rose from £200,000 per hectare in 1998 to £1,830,000 per hectare in 2006 - an increase of approximately 900%.

21.1 Scale of Need and Nature of the Problem

10 Housing supply in Scotland is facing significant challenges over the coming years from population growth and demographic changes. Scotland's already growing population is projected to increase by a further 10% (760,000) by 2035. In addition, steadily improving life expectancy will lead to a 75% increase in people aged 75 and over by 2035, and there is a projected 44% increase in the number of single person households within the same timeframe. The cumulative impact of these trends is that Scotland will have an additional 500,000 households (an increase of 21%) by 2035, leading Audit Scotland to conclude that around 500,000 new houses will need to be built between now and 2035.8

11 It should be borne in mind that the precise level of housebuilding required will also be influenced by the life and performance of the existing housing stock. Of the homes we will inhabit in 2050, around 80% of them are already standing today. In a nutshell, investing in regular maintenance and house improvements reduces the demand for new houses. There are currently 2.5 million homes in Scotland's existing housing stock. Of these, around 600,000 are the responsibility of local authorities and social landlords, while the overwhelming majority, 1.9 million, are privately owned.9 In 2012, a physical survey of dwellings as part of the Scottish House Conditions Survey was undertaken on 2,787 houses of which: 1,754 were owner-occupied and 292 were privately rented. This sample of 2,046 privately owned houses does provide a reasonably accurate picture of the condition of privately owned housing. The Group considers that without a strategy to address particularly the poorest housing, this situation is likely to have an adverse impact on future housebuilding targets.

12 In their response to the Audit Scotland report, the Scottish Government "broadly agree with the scale of future need and demand". ^[10] To achieve this target over the next 20 years will require the building of 25,000 houses a year, a figure which is considerably more than the 14,000 houses built in Scotland during the course of last year. A particular concern in discussing housebuilding targets, is the collapse in the number of new homes being built by the private sector, which have fallen from 21,656 in 2007/8 to 10,039 in 2011/12.

13 This housebuilding target is referred to within the Scottish Planning Policy, currently under review. ^[11] This highlights the important contribution which the planning system can make towards delivering the required number of houses, by "identifying and allocating a generous supply of land". The statement does however acknowledge that "delivery of housing does not rely solely on the allocation of appropriate land in the development plan", citing "the capacity of the construction industry and the functioning of the housing market" as other important factors.

14 The following graph of new house building trends in Scotland ( Fig. 20) shows that the required target level of 25,000 new houses per year was barely reached at the height of the pre-financial crisis housing boom, and as such, is extremely unlikely to be reached in the foreseeable future by the current housing market. Meeting housebuilding targets will require an acceleration of housebuilding in Scotland, whereas the supply of new houses is currently largely in the hands of an industry whose " business model is predicated on the slow release of new houses onto the market". ^[12]

15 It is interesting to note that the period of greatest new house building in the early fifties and late sixties was characterised by a much higher level of public housing and a more proactive role being played by public agencies. When one considers both the historical data, and the experience of other European countries, it is difficult to see how the housebuilding targets required can be delivered without a greater level of market intervention involving a redefined role for the public sector. It is important to stress that market intervention today does not necessarily need to mean public sector construction. Making land available through the active management of the land supply would actually encourage new private sector players to come forward, achieving the diversity of producers essential to increasing production.

16 The Scottish Government's current Planning Policy also goes on to say that "the planning system should enable the development of well-designed, energy efficient, good quality housing in sustainable locations". ^[13] High standards and good quality placemaking are laudable ambitions, but the reality is that within the UK housing market, the private sector is building some of the smallest, least energy efficient and, arguably, poorest designed houses in Europe. The Scottish Government has been committed to placemaking at a policy level for a number of years now, but this progressive policy is unlikely to be fully realised through the operation of the current planning system alone. It is therefore essential, that any market intervention in the housing market is equally designed to improve standards and placemaking.

17 In their first annual report in 2008, the Scottish Government's Council of Economic Advisers concluded that " too much development in Scotland is a missed opportunity, and of mediocre and indifferent quality". ^[14] This is what Gulliver and Tolson describe as "placeless, single-use housing development, characterised by poor estate layout, over-engineered roads, dominant parking, poor amenity space, lack of connectivity, and bereft of facilities and planting". ^[15]

18 As the levels of private housing output have increased over the past 30 years, the housebuilding sector has become increasingly dominated by a smaller number of larger firms. To give some sense of scale, one of the UK's top three house-builders sold almost 9,500 new houses alone in 2010. ^[16] The business model of volume house-builders is essentially speculative and involves the need to continually land bank. In addition, the volume house building model does not suit much of rural, and particularly remote rural, Scotland, and this is reflected in the limited involvement of these companies in many rural areas. In general, fewer and larger sites, controlled by fewer and larger companies is unhealthy in terms of competition, local placemaking, design and quality standards, housing choice, house prices and local production and supply chains - all of which are essential elements for creating sustainable communities.

19 Unlike the UK, many European countries have a much more diverse house building industry with significant levels of 'self-build' being commonplace. The term 'self-build' refers to small scale housing development, where houses are built or procured by the people (acting individually or collectively) who will actually live in them. This includes the kind of community-led, co-operative or mutual home ownership initiatives which have been so successful in mainland Europe. Crucially, the self-build model removes the speculative element which characterizes the dominant volume housebuilding model. Because people are building homes to live in, rather than houses to sell, self-build also leads to more energy efficient houses, which tend to be designed to a higher standard.

20 In the UK, self-build currently accounts for between 10% and 15% of the market. In many EU countries that figure is nearer 50%. ^[17] In terms of land supply, the Office of Fair Trading, in their 2008 Report on Housebuilding, point out that "in terms of ensuring that land which is already available for housing is used efficiently and output maximised, it is important to maintain a vibrant self-build sector". ^[18] However, in terms of land reform, a strong self-build sector is also essential if we want to diversify home ownership and encourage the development of community-led initiatives and alternative housing models such as mutual home ownership and different forms of co-operative housing.

21 The Review Group considers that a strong self-build sector is a key factor in the efficient use of land and in encouraging different forms of home ownership. The Group recommends that encouraging and supporting the development of a vibrant self-build sector should be an explicit aim of housing strategy in Scotland.

21.2 Housing and the Economy

22 As has been all too well demonstrated in recent years, the fortunes of the housing market and the wider economy have become inextricably linked, and therefore efforts to intervene in the housing market require to take cognisance of any implications for the wider economy. Most commentators recognise that the UK has become too dependent on the banking system to support our housing system, and we are arguably too dependent on our housing system to support economic growth. An economic growth policy built largely on rocketing house prices and consumer debt ( UK mortgage debt stood at £1.237 trillion in 2010) led to unsustainable levels of borrowing and ultimately the financial crash in 2008, triggered by imprudent lending and the weakening of, in particular, the US economy. ^[19] The Barker Review draws attention to the problem of property inflation unhelpfully being counted as "economic growth", and points out that this is also a major contributor to social inequality. ^[20] High housing costs, Barker goes on to argue, impact negatively on wider economic performance by reducing labour market mobility and making the UK an increasingly expensive place to do business.

23 Central to UK housing policy for the last 30 years has been the support and popular demand for home ownership. However during her recent visit to the UK, Raquel Rolnik, the UN Special Rapporteur on Adequate Housing, while accepting that " home ownership has provided housing for more than one generation and it is deemed a common aspiration for many" went on to warn that " the takeover of the housing sector by the finance sector has exposed many households to a highly volatile market, with skyrocketing prices during the boom years and, since 2008, a credit crunch which has essentially paralysed access to credit... various stakeholders have warned of potential risks once the interest rate on mortgages starts to rise." ^[21]

24 UK house price inflation is currently around two and a half times the rate experienced in the rest of Europe. While there is no clear consensus, an increasing number of economists now believe that house prices in the UK are much too high. This has significant macroeconomic consequences, not least of which is the fact that the finance and banking system is based on current land values, and any devaluation of land would therefore significantly undermine both its sustainability, and the role it plays in underpinning the economy. Any devaluation of land would also have serious consequences for many households, for whom the house is invariably the family's major financial asset.

25 While the case for market intervention to deliver Scottish housebuilding targets is compelling, any new policy would have to be implemented sensitively, in a way which minimised disruption and dislocation, and avoided pushing thousands of Scottish households into a negative equity situation.

21.3 Housing Land Corporation

26 " Without a step change in our attitude towards fixing the housing crisis we'll stay locked into a boom and bust housing market which increasingly crowds out young, poor and vulnerable people". - Joseph Rowntree Foundation. ^[22] The solution to achieving Scottish Government housebuilding targets, in a way which delivers quality placemaking and improved housing standards is likely to be characterised by:

• Managing the land supply in the public interest
• Capturing a greater percentage of rising land values to support the public interest
• Lowering land and house prices
• Encouraging a greater diversity of housing providers

27 The Group believes that central to any solution is the establishment of a new national body with a clear public interest remit. The new body will be referred to as the Housing Land Corporation ( HLC), but whether it would require to be established as a statutory corporation is less important than the proposed function of the agency, which is central to our proposition. Working alongside local authority planners the HLC would achieve its public interest objective by taking land into public ownership at a low but fair price, investing in the necessary infrastructure, and then selling the land to house builders as serviced sites or plots. In addition to facilitating more house building (better designed and more energy efficient) more quickly and more cheaply, land ownership would provide increased control and ability to influence the quality of placemaking.

28 The HLC would acquire short-term as well as strategic land and would bank enough land to fully address the number and quality of houses needed. It would introduce variety into the market by selling to different kinds of housebuilders and not operate exclusively in the interests of the volume house builders. In addition to delivering sufficient land to meet housing supply needs, the HLC would be charged with contributing to the stabilisation of the price of land by bringing land price inflation in line with the European average. Over time this in turn would begin to readjust the mortgage to earnings ratio.

29 Investing the HLC with the necessary back-stop powers (a minimum of the compulsory purchase powers discussed in Section 8) will be critical to its success, as will the necessary confidence and ability to utilise these powers effectively. The HLC could decide to subcontract some activity to some of the larger local authorities (possibly providing training and capacity building if required).

30 The HLC would operate within planning guidelines and this should ensure a meaningful partnership with the relevant local authority. Where required, the HLC would be able to establish joint venture companies to develop land in a particular area. This approach would bring the new public body together with developers, land owners, local authority and community interests. The model allows for those communities whose interest was greater than simply commenting on proposals, to have a far more direct role in development. In this situation it may be possible for communities, through their representative bodies, to be involved in any joint venture company being established, thus furthering opportunities for community ownership.

31 The HLC would clearly require borrowing powers, and it is likely that banks would be more inclined to lend to the agency, than to existing developers. The cost of acquisition of land could be minimised or controlled in one of two ways, dependent on how many land owners were potentially involved. If a single owner was involved, the land would transfer to the HLC at the point at which it was allocated for housing, and the owner would be compensated to the tune of the residual value of the land, once public contributions had been deducted. This would still be greater than its agricultural value. In the case of several owners, a number of approaches could be taken. There may be some merit in exploring an approach being developed by the London School of Economics, which involves owners engaging in a silent auction. If adopted, this would enable the agency to balance cost and location in deciding which land to acquire.

32 There is no reason why the HLC could not be cost neutral, or thereabouts, for the taxpayer over the medium term. The operation of buying, servicing and selling the land should only require additional PSBR (Public Sector Borrowing Requirement) borrowing at the outset, since the resale of land to housebuilders would claw back much, if not all, of this initial cost. A rolling fund could thus be created to enable this approach to be sustained over time. Moreover the creation of new homes will increase Council Tax revenues to the relevant local authorities.

33 The intervention of the HLC in the housing market is also likely to make it (and the macro economy) much less susceptible to the kind of booms and slumps which have characterised economic performance for years. The example of Germany is instructive, where over a lengthy period of time their interventionist approach has resulted in a freer, more diverse and much better functioning market which has largely avoided the boom and bust of the UK housing market. ^[23] This therefore presents an opportunity for Scotland to take a different path from the rest of the UK, which is likely to remain locked into the model of speculative house building for the foreseeable future.

34 This proposal would require to be explored further with those currently involved in the housing sector, and if implemented would require some form of readjustment for current house builders. However, in addition to boosting the self-build sector, the Group understands that the provision of serviced sites would be attractive to current housebuilders.

35 It should be recognised that a considerable amount of land zoned for housing development is currently in the hands of existing housebuilding developers, and it is likely that transition arrangements (over a five to ten year period) would be necessary to minimise disruption to ongoing housebuilding programmes. To address the possibility of medium and long term land banking, any interim arrangements could also include the introduction of a new 'use it or lose it' power for use when planning consent is being reapplied for.

36 The Review Group considers that existing mechanisms are unlikely to deliver national housebuilding targets, in a manner compatible with Scottish Government place-making aspirations. The Group recommends the establishment of a Housing Land Corporation, a new national body charged with the acquisition and development of sufficient land to fully achieve these objectives.

21.4 The Rural Housing Context

37 Whilst the creation of a Housing Land Corporation to markedly increase the supply of houses being built would benefit both urban and rural communities alike, housing policy has to be sufficiently nuanced to reflect the distinctive characteristics of urban and rural communities.

38 The urban environment has provided the context for much of this section, and the vast majority of the new houses will have to be built in our cities and towns. Responses to our Call for Evidence suggest that the urban housing problem is often characterised by insufficient social housing to meet housing need, the effective creation of housing ghettoes, and the creation of commuting settlements. It was also felt that the location of new housing development on the green belt often undermined the viability of city and town centres, which require a certain level of population density to be sustained - often achieved through brownfield site housing development. Control over the assembly and ownership of land by the HLC, coupled with sympathetic local planning by local authorities, should ensure that many of these problems, including the need for better placemaking, could be more effectively addressed within the proposed new model outlined above.

39 In rural parts of Scotland, the unavailability of appropriate and affordable housing is frequently a major obstacle to achieving sustainable communities. Many rural communities face the challenge of arresting depopulation and, in particular, retaining young people within, what are often, fragile local settlements. Yet despite the importance of housing as a critical rural development issue, many organisations and commentators refer to the current situation as a 'rural housing crisis'. Levels of homelessness are markedly higher in rural areas of Scotland. There are higher levels of dampness and disrepair. The cost of housing relative to disposable income is also much higher in rural areas, due to a combination of higher building costs and lower than average incomes. Crucially, there is a far greater reliance on the private rental sector, which throws into sharp focus the patterns of land ownership in Scotland and the systems which govern land, and how these impact on the ability to fully address rural housing need.

40 In terms of addressing rural housing need, there are three issues which need to be considered: patterns of tenure and ownership, providing sufficient land for housing development (at the right price) and the most effective use of existing property. The concentration of land ownership in rural Scotland means that all three of these areas are still dependent to a large extent, on the attitudes and decisions of a relatively small number of people and the asset policies of a relatively few public sector agencies.

41 A 2012 survey of members of Scottish Land and Estates estimates that private estates currently let in excess of 9,000 houses, making them an important provider of rented housing in rural, and particularly smaller rural, communities. ^[24] There are clearly some examples of landed estates who have made a significant contribution to local housing provision, although this is by no means universal across all estates. The private rented sector in general makes an important contribution to overall housing provision within rural communities and it has been well argued that this could be further encouraged through changes to the UK taxation system which would encourage and incentivise rural land owners to further develop private rented housing provision. ^[25]

42 Tied housing accounts for around 40% of the rural private rented sector. Information on tied housing is patchy and the role of tied housing in a modern private rented sector and rural economy, and the condition and operation of tied housing, are issues that merit further investigation. Of concern within a land reform context is the potential number of tied housing tenants who do not have a proper tenancy agreement, and therefore lack the security which that affords.

43 About 97% of land in Scotland is designated as rural and this land mass hosts 976,000 people, less than 19% of the Scottish population. ^[26][27] Fig. 21 the map of Scottish Government's urban/rural classification shows this. Given this situation, it is difficult to understand why accessing land for new housing development (both individual plots and small housing sites), continues to prove so problematic. There is a clear social imperative to develop the supply of housing, and particularly social housing, in many parts of rural Scotland, and it is envisaged that the HLC will accelerate the supply of land for this purpose.

44 The danger in chasing the kind of national housebuilding targets required is that the development of new housing in rural parts of Scotland is likely to gravitate towards larger rural settlements, as confirmed in the Planning Policy Review. While there are often good reasons for this, it is important that new housing is also built in villages and small rural communities to meet specific local housing need. We therefore need to ensure that increasing housing supply includes many more of the 'small scale interventions' which will tap into the kind of organic, imaginative, bottom-up solutions capable of renewing our villages and small communities. The Group recommends that the HLC should have explicit performance targets that recognise the needs of rural, as well as urban, communities.

45 It is important that attention to rural housing (particularly in the smaller settlements) is given sufficient weighting within housing and planning policy and that more effort is made to identify and address very localised, specific housing need. An essential element of this approach is the encouragement of, and support for, community profiling or local housing needs analysis. Based on this information, the prioritisation and zoning of land around small vulnerable settlements for housing / affordable housing should be incorporated within Local Development Plans.

46 One of the easier ways to reflect the public interest in land, is at the point at which land is being sold or transferred. Introducing a public right of pre-emption, administered by the local authority, at the point of sale or transfer would provide another mechanism to make more land available for acute housing need in fragile rural communities (see Section 17). This would enable a local housing body or community self-build group to register an interest in a possible housing site, and have a specified period (say, 6 months) to match the best price offered if the land comes on to the market. In administering the public right of pre-emption, the local authority would have to be satisfied that the social need case for acquiring the land was in the public interest.

47 In many rural areas, the housing problem is exacerbated by second homes and holiday homes, which can impact negatively on both housing supply and house prices. In response to this situation, various measures have been introduced, both within the UK and in other countries, in an attempt to address local housing need by restricting second or holiday homes. These have included planning measures, financial incentives and disincentives, occupancy control, rural exception policies, marketing campaigns and local taxation. In a study commissioned by the Scottish Government in 2009, Satsangi and Crawford concluded that these measures tended to have a limited impact and often had negative consequences. ^[28] In some cases the measures introduced proved difficult to administer.

48 Despite those limitations it is worth noting that local authorities currently have discretionary powers to reduce or remove second and empty home council tax discounts, and this has enabled some local authorities to build up useful pots of money for new, affordable housing. ^[29]

49 The Satsangi and Crawford study reinforces the conclusion that the land supply issue remains at the heart of the rural housing problem. As such, the Review Group believes that the proposed Housing Land Corporation with the necessary powers, combined with greater recognition of specific rural housing need in the planning process offers the best prospect of delivering the right kind of rural housing, in the right place and at the right price. This role should involve close liaison with key housing development agencies. ^[30]

50 The Review Group considers that specific attention requires to be focused on the housing needs of rural communities. The Group recommends that in these areas, the Housing Land Corporation should have explicit performance targets that recognise the specific needs of small rural communities and an extended operational role to enable these to be addressed.