Gavin McCrone: It's time to put houses in order on borrowing

One of the striking features of the financial crisis is that it is the countries with the largest owner-occupied sector in their housing stock, the UK, Spain and Ireland, that have been worst hit. All three have 70 per cent or more of their housing stock in owner occupation.

Greece, of course, has been worst hit of all and there are many reasons for that apart from housing, but it too has a large owner occupied sector. By contrast, the owner-occupied sector in Germany is less than half of the total housing stock and even less than that in Sweden and Switzerland. Even in France and the Netherlands it is less than 60 per cent.

As this shows, the proportion of a country's population that own their own homes has relatively little to do with their wealth. Most countries have a much larger proportion of their housing stock in private rented tenure, and all countries, however wealthy, have a proportion of their population whose incomes are insufficient to pay the true cost of what is regarded as an acceptable standard of housing. They therefore have some of their housing stock rented at social rents, financed with government support.

In the UK, the pattern of housing tenure has changed radically over the last 30 years. In England, 58 per cent of the housing stock was owner-occupied in 1981 but that has risen now to 70 per cent. Scotland traditionally had a markedly different housing policy from England, but here too the proportion of owner-occupied housing stock has risen sharply - from 36 per cent in 1981 to 66 per cent in 2009, very nearly catching up the English level.

The main reason for this change, which has not occurred to anything like the same extent in other countries, has been the emphasis given by successive governments to owner occupation and in particular the policy introduced by Margaret Thatcher's government of "right to buy". This enabled council tenants to buy their property at very heavily discounted prices; but the new owners were free to sell later at full market prices. The policy was obviously popular and it resulted in a huge transfer of wealth to a less well-off section of the population, but it also meant that there was an increasing shortage of housing for those that could not afford to buy or rent at market rates.

The shift to owner-occupation was also facilitated by easy lending from banks and building societies following the liberalisation of the financial sector known as "Big Bang".In response to this demand, house prices rose dramatically and people came to believe that a house was an asset that would always rise in value. The result was that many people bought houses at prices that were up to and even beyond the limit of what they could afford, leaving no margin in the event of interest rates rising or their incomes falling as a result of rising unemployment.

Others increased their mortgages in order to spend money on other things - a new car, a holiday or simply increased personal expenditure. The result was a boom in the economy, but a boom based on ever rising credit.

It was inevitable that this would end in tears. We had failed to learn the lessons of the past. The painful recession of the early 1990s had seen house prices fall and interest rates rise with many people experiencing negative equity and a considerable number of repossessions. This time, although the Bank of England's interest rate is at its lowest ever level, those people having to renew their mortgages are facing the prospect of higher rates, as banks have switched from easy lending to repairing their balance sheets. Many first-time buyers are finding it difficult to get a house on terms they can afford. The credit boom has ended, consumption expenditure has fallen, unemployment has risen and inconsequence falling tax revenue and increased expenditure on benefits leave the state with an unacceptably large deficit.

If we are to avoid going through all this again at some time in the future, we need a much better balance in housing policy. There should be an opportunity here for Scotland as, with devolution, there is no reason why its housing policy has to be a copy of that in England. While undoubtedly the majority of the population aspire to own their own house, there needs to be good alternative provision for those that are not able, or not yet able, to afford it. In Germany, most people use rented accommodation until they are fairly well on in their careers and able to settle down. Mortgages are generally not available at the very high loan to value ratios or loan to income ratios that were commonplace in Britain. For those unable to afford to buy or pay full market rents, a good quality of social rented accommodation also needs to be available. In Scotland, this is an issue of particular importance in many rural areas, where incomers, either wishing to retire or to buy holiday property, have often pushed prices well beyond what local people can afford, even those with jobs. While incomers can be of real benefit to the local economy, the result can also be damaging to economic growth.

This is not a plea for the return to massive council house building. While there is much good local authority housing, Scotland has had more than its share of bleak soulless council house estates.In other European countries, council housing is virtually unknown, the preferred model being for housing associations to build and manage social housing. Over the last 20 years, housing associations have also been the main providers of new social housing in Scotland and there is much to be said for this type of provision, especially if the associations are community based or for special needs and not too large.

The private rented sector has expanded in Scotland over the last ten years, from a low of 5 per cent of total stock in 1999 to 10 per cent in 2009. This is far below its level in most other European countries. The sector did, of course, get a very bad name in the past both for exploitation and poor quality housing. But there is no reason why that needs to be a problem in future with a properly regulated system and the past ten years have seen investment in buy-to-let housing, which is welcome and could play an increasing role in future. For those unable to pay the full economic rent, or who are simply in temporary difficulty as a result of a period of unemployment, housing benefit can be available.

Owner-occupied housing will no doubt remain the predominant form of housing tenure in Scotland, as in Britain, because that is what most people want. But we need to end a situation where people are under excessive stress through taking on mortgage payments they can barely afford, where first-time buyers cannot find anything they can afford and have to live with in-laws and people are faced with the pain of negative equity and repossessions if the market turns down or interest rates rise.

Above all, we need to avoid an economy that has a boom based on unsustainable borrowing, much of it on mortgages, and recessions that are consequently worse than they need be when that borrowing has to stop.