Scotland's Land Market: Time to Reform

Shona Glenn, Head of Policy and Research, explores the crucial need to focus on Land Rights and Responsibilities in addressing market failure to reform the land market in Scotland in our latest blog.

The past year has been brutal – but if there’s one good thing to have emerged from the pandemic, it is an enormous appetite for change. ‘Build Back Better’ – a phrase originally associated with disaster relief – is now firmly embedded in economic recovery plans on both sides of the Atlantic and talk of fairness and wellbeing is now commonplace across the political spectrum.

The Scottish Land Commission’s work shows that to deliver this, we need to put land firmly back into our economic model. The starting point for doing this is to fix our dysfunctional land market.

That is why, over the next three years, we will be delivering a programme of work focused on land market reform.  Our intention is to identify changes that could be made to policy, practice and (if necessary) legislation to help improve how land markets function.

But to do that effectively we need a framework – a guide to help us work out when intervention might and might not be desirable. 

For this we can look first to the idea of market failure. Rooted in the tradition of welfare economics, market failure describes situations where the rational decisions of individuals acting in their own self-interest fail to deliver the best outcome for society as a whole. The concept rests on the idea of a (somewhat fanciful) idealised market in which:

• all parties to a transaction can access relevant market information
• there  is a large number of suppliers providing identical goods
• there are no barriers that would prevent people from entering (or leaving) the market
• any spill over effects (positive or negative) from private economic activity are reflected in prices and borne directly by the entity responsible.

It is immediately apparent that these criteria often do not apply to the land market.

In some communities the supply of land is dominated by a very small number of landowners, which can pose challenges for housing supply. Information about who controls land can be difficult to find. Options agreements – devices used by developers to get first dibs on land - are commonplace but invisible, and reliable data on the price paid for development land is scarce.

Perhaps most obvious of all, the way land is used often has negative effects on society that are not borne by the landowner. Think of the effects of derelict buildings on the high street or the effect of upland management on flooding, or greenfield housing developments on biodiversity.

Addressing these kinds of market failures would make the economy more competitive and efficient. This would be a good start – but it won’t be enough. We also need a framework that will help to make the economy fairer and more productive.

For this we could look to the principles set out in Scotland’s Land Rights and Responsibilities Statement (LRRS).

The LRRS sets out six principles. Four of these relate directly to the ideas underpinning market efficiency. But the LRRS can help us to take this further, by tapping into broader notions of equity and collaboration.

The importance of equity as an economic issue is now well understood. Before the pandemic UK GDP was at least 9% lower than it should because of rising inequality over the past 30 years, and events over the past 12 months have only made things worse.

With land now accounting for around 57% of UK net worth, our approach to land must be at the heart of addressing this.

Of course, inequality exists between generations as well as within them. The gaps between housing haves and have nots, and the depleted natural environment we will leave to future generations are both examples of how our current approach to land exacerbates intergenerational inequality.

Another important concept at the heart of the LRRS is collaboration and this is where the LRRS could really help us move beyond traditional ideas of market failure towards more a more holistic idea of what a well-functioning market economy should look like. One that moves us beyond  models of value extraction and towards more modern ideas of value creation.

At the heart of this is a discussion about the proper role of the state.

Should the role of the state simply be as an arbiter. There to enforce the rules of the market and enable profit driven firms to extract maximum profits? Or should it play a more active role in making and shaping the market and coordinating activity to create real value that wouldn’t otherwise exist? The kind of value that can’t readily be measured in pounds and pence.

If it’s the latter then we need to start listening to important thinkers like Mariana Mazzucato, who tells us that this kind of innovation will not be delivered by the market alone – but only through massive collective effort.

That means we need to find effective ways of harnessing and combining the passion and enthusiasm of the third sector, the skills and experience of the private sector and the financial leverage and democratic mandate of the public sectors to do things the market won’t. This will demand a new mindset based on a genuine commitment to collaboration and co-creation. It will also require new governance and ownership structures to enable it to happen.

Nowhere is the need for this kind of approach more obvious than in relation to housing. That is why  the first focus for our work in this area is on how reforming how the land market operates – and looking at new models of governance and control – could help to address Scotland’s housing needs.

To achieve Scotland’s ambitions of a greener and fairer nation we must put land back at the heart of our economic model. To do that we need to challenge long held views about the role of the state and move beyond the constraints of the market failure doctrine. A focus on Land Rights and Responsibilities can help us to do that.