Housebuilding market consistently failing to deliver

The Competition and Markets Authority delivered its final report on the housebuilding sector at the end of February, finding a range of problems. The report follows a six-month market study where the CMA, following requests from government and politicians, used its formal powers to seek a range of data from housebuilders and interested parties across the country. The CMA received more than 36 substantive responses from housebuilders, public bodies and representatives of consumers and SMEs as well as engagement from devolved and national government. Where a study identifies issues in the competitive functioning of a market, the CMA has the power to initiate a more formal market investigation lasting up to two years. Previous market investigations into the groceries, funeral services and legal services sectors have resulted in the CMA using its powers to implement market-wide compliance reforms, such as requirements for price transparency or restrictions on use of land. Outcomes The CMA has identified a number of concerns, concluding that the housebuilding sector is not delivering well for consumers, with problems arising in the planning system leading to distorted incentives for housebuilders’ build-out rates, particularly with respect to affordable housing. The CMA also identified a range of issues relating to the quality of new builds. Notwithstanding this, the CMA declined to use its formal powers, concluding that it was not best placed to deal with such structural issues. Instead, the CMA has recommended that national and devolved governments take action to introduce structural reform. The CMA’s conclusions differ somewhat from its preliminary conclusions, where it considered there were concerns around landbanks held by the largest housebuilders and concerns in a number of specific local authority areas. Key themes The CMA recommended national and devolved governments consider reforms across different areas which, in its view, would bring about the delivery of more homes of better quality. It has also taken significant aim at the private management of amenities at new-build sites. The CMA recommends: • Planning reform, having concluded that the system is a significant impediment to housebuilding, particularly given timing and predictability issues. The CMA’s recommendations include streamlining processes, limiting and reducing the time impact of statutory consultation processes, raising planning fees, and incentivising and requiring (in some cases) planning authorities to increase the number and diversity of sites for which planning is granted and the number of houses at such sites. • Additional quality regulation, including adoption of a single mandatory consumer code and activation of the Housing Ombudsman as well as transparency requirements for optional extras and the prohibition of drip pricing – revealing additional charges for “extras” (where the CMA also signals a readiness to use its existing consumer enforcement powers). • Changes to estate management companies’ management of amenities, where the CMA found particular concerns with fees, consumer choice and quality. The CMA is highly critical of this and effectively recommends the abolition of this practice through mandatory adoption of amenities currently managed by estate management companies as well as adoption as default. • Considering alternative models, given that the speculative model of housebuilding is failing to deliver the level of housing committed to by multiple governments. The CMA suggests that government could consider: (i) significantly increasing the delivery of publicly-funded housing by local authorities and housing associations; (ii) incentivising non-speculative housebuilding such as self- or custom-built homes; and (iii) considering a role for the public sector in acquiring land for development. In doing so, the CMA recognises that these are complex policy choices with trade-offs for government and public bodies. What’s next? In pointing out the issues it has to government, the CMA has largely left these matters in the hands of policy-makers. The issues are complex, particularly when considering wider legislation which impacts planning authorities’ duties and the competing visions for planning reform coming from major political parties in advance of a general election. However, in conducting its market study, the CMA has identified suspicions of anti-competitive information sharing by eight major housebuilders and has launched a separate investigation into those housebuilders. Such investigations engage the CMA’s powers to issue significant penalties, including fines of up to 10% of group turnover and the ability to pursue company directors for disqualification. This is not the first time that the CMA has launched a behavioural investigation following a broader market study, but it is a significant investigation given the number of companies involved. Barratt and Redrow also announced their plans for a £2.5bn merger in February 2024. The CMA will therefore be conducting a separate review into the closeness of competition between those companies both at a national and local level, which will likely consider both the factors set out above but might also allow the CMA to consider more closely the specific landbanks and development sites of Barratt and Redrow. It remains to be seen whether the CMA will raise specific concerns, given its more general concern that the market is not delivering and its conclusion that this is a structural issue. The CMA has identified lots of problems, but solutions still seem to be some way off. In the meantime, housebuilders will need to take particular care to ensure that they take heed of quality and transparency concerns given the CMA’s clear readiness to use its enforcement powers. As ever, the launching of a separate investigation into potential anti-competitive conduct is a timely reminder of the continued focus the competition regulator has on the construction industry. Mark Crane is a partner in the competition and regulation team at Addleshaw Goddard Photo by Ian Murray/imageBROKER/Shutterstock (14301038df)