Scotland's housing must learn the lessons of the Great Depression

A new story about housing today couldn't be a starker reminder of the limits of market power nor a clearer critique of government policy. Scotland is seeing a significant slump in its property market, and it is happening despite the market's pricing properties at comparatively competitive rates by UK standards.

The story itself is simple; despite having one of the UK's more affordable housing markets, Scotland has seen the number of mortgages applied for fall nearly ten per cent behind the UK average. The survey (by the Royal Incorporation of Architects Scotland) shows that this is the result of a collapse in confidence in the economic conditions underlying the housing market.

Free market theory suggests that the route to sorting this is to continue to re-price housing until it is cheap enough to rebalance this consumer threat assessment. In market theory, if the Iran War increases the risk on one side of the equation, the market has to reduce the risk or increase the reward on the other. Both require houses to be sold for less.

But we know that the UK economy is inordinately reliant on rising house prices. A 'housing recession' is viewed almost wholly negatively across the political spectrum. What is telling is that they use the term 'recession' (very bad) and not 'devaluation' (not necessarily bad in itself), despite the fact that reducing prices is a devaluation and not in any way a recession.

The point is that the UK housing market has been distorted to the extent that it is now treated as primarily a reliable investment opportunity which will always rise in price. Almost like gold, housing has been treated as an investment product of last resort, which will always return reliable results and will never lose significant value.

We have therefore created a housing system that can simultaneously only get itself out of a crisis of confidence through devaluation, but which can never devalue because it is not primarily being treated like a housing market but like an investment market.

This is more compelling evidence to support Common Weal's analysis; the market alone cannot fix a crisis in the housing market, most obviously because the market caused the crisis in the first place. This is like a lesson in unfashionable economics. We are reaching the end of more than 40 years of a single economic orthodoxy, and it is ending like the last time we followed that orthodoxy.

The parallels are very similar. In the early 20th century, there was a short era of high levels of speculative investment in rapidly developing technologies and industrial expansion, which resulted in a highly unequal distribution of wealth and covered over significant weaknesses and risks like high consumer debt and problems in the banking system.

This is what leads to the development of Keynesian economics. One of its most important concepts was that when markets misfire, those markets can only correct themselves through brutal means of creating economic depression, which 'resets' parts of the system (at great human cost). Keynes points out that there is an entity in society which does not need to be bound by those market rules.

Government is different, not least because of its different borrowing powers and economic interests. A private interest will often have no incentive to invest to increase supply if it reduces unit cost and profitability; a government does. And since a government can borrow over long periods at low cost and does not need to make large profits from doing so, it can invest in different ways. Unlike private business, if the government makes people better off, it gains in tax revenue. It can sacrifice something in housing profits to gain from tax take increases.

When the market is in one cycle (contraction), and this isn't in the public interest, the government can make what are known as countercyclical investments, spending money to reverse contractions for the public good, even if more money could be made from following the market into contraction.

The lesson for this for Scotland in 2026 is as simple as can be; the only entity in the market that can act against this cycle of housing market tightening in the timescales our society needs is the government. It has one task if it is treating housing as a social mission, which is in crisis: to build houses.

This does not mean to mess around with market conditions, hoping someone else will build affordable houses. That has been the main policy for 20 years, and it has not worked at all. It means the government and its agencies are building houses directly using publicly-borrowed money and putting these on the market at a quality and price which disrupts the risk-reward calculus we began with.

Common Weal explains how this can easily be done in our policy paper, Good Houses for All. The evidence that this is our route forward is now overwhelming.