One year since launching a market study into housebuilding, the Competition and Markets Authority ("CMA") has published its final report, finding a number of "fundamental" concerns with how the market operates.
Our previous blog briefly summarised the key recommendations for government intervention. In this article we review the CMA's conclusions and consider what the recommendations for reform mean for the sector going forward.
How did we get here?
Having announced its intention to launch a market study into housebuilding in January 2023, the CMA formally commenced its inquiry under the Enterprise Act 2002 on 28 February 2023. This obliged the CMA to produce a report within 12-months which could:
- determine no further action was required,
- make non-legally binding proposals, including to government, or
- refer any identified feature for market investigation, following which the CMA could impose legally binding remedies.
The CMA published updates in August identifying those market features it was considering referring to market investigation and followed up in November with preliminary indications of its potential conclusions.
The final report
The central finding of the final report is that the housebuilding market in Great Britain has persistently under delivered in the supply of homes because of a reliance on speculative private development and a complex and unpredictable planning system. Despite suggesting in August that it might do so, the CMA declined to refer any features of the market for a market investigation (an outcome that could have led to the CMA issuing legally binding orders to housebuilders) and has instead made several non-binding proposals for reform to the UK, Scottish and Welsh Governments which it believes will help produce the outcomes sought.
Planning process
On planning, the CMA's report concludes that planning rules produce unpredictable results and excessively delay construction, requirements to consult statutory stakeholders often cause unnecessary delays, and many Local Planning Authorities ('LPA') are under-resourced and lack incentives or plans to deliver the number of homes required.
While the CMA identifies these failings as central causes of the market's failure to deliver, the CMA considered it was not appropriate to make specific recommendations given the policy trade-offs involved. It did, however, make proposals for consideration by the UK, Scottish, and Welsh Governments, including:
- streamlining planning systems and increasing LPA capacity to reduce timescales,
- introducing measures to incentivise builders to diversify the tenures and types of homes built, and
- ensuring that LPAs put local plans in place and are guided by clear targets which reflect the need for new homes in their area.
Quality of new build homes
On quality, the CMA considers that there is currently limited incentive for housebuilders to provide good homes, and has recommended that the UK Government, in consultation with the Scottish and Welsh Governments, introduces:
- a mandatory consumer code for all housebuilders in Great Britain,
- mandatory jurisdiction for the New Homes Ombudsman to enforce the code, and
- a mandatory satisfaction survey from which housebuilders are required to publish key quality metrics.
Additionally, to address concern around hidden costs for purchasers of new-build homes, the CMA recommended that the UK Government:
- requires that the cost of optional extras is prominently disclosed alongside the headline price,
- prohibits drip pricing, where consumers are shown an initial price only to later find additional fees, and
- prohibits the presentation of charges as optional where it is reasonably foreseeable that most consumers would have to pay them.
Estate charges
In its August update the CMA identified the increasing use and cost of private management arrangements for public areas in new housing estates as an area of concern. In its final report, however, it has ultimately declined to refer that for a market investigation on the basis that it would be better addressed by government action than by CMA orders.
In particular the CMA has recommended that the UK, Scottish and Welsh Governments each implement common adoptable standards for public amenities in new housing estates, and mandate adoption of public amenities in new housing estates by local authorities in all but exceptional cases. It also recommended that the UK Government introduces enhanced consumer protection measures for households with private management arrangements and ban 'embedded management arrangements' under which developers appoint estate management providers and then prevent homebuyers from changing them.
Speculative private development
Reliance on speculative private development is, alongside planning, identified as one of most significant market features behind persistent under-delivery. This model - where private builders obtain land, secure planning permission, and construct homes without knowing who will buy them - accounted for around 60% of all homes built from 2021 to 2022, and the CMA has concluded that it incentivises homebuilders to match the absorption rate (i.e. to build the number of houses which can be sold without reducing prices) rather than meet demand.
Despite identifying this as a critical flaw in how the market currently functions, the CMA concluded that any steps to resolve it were largely beyond its remit. It did, however, suggest some high-level reforms for consideration by government, including significant increase in the delivery of publicly funded housing, and substantial reform of the land market, for example by creating a more active role for the public sector in the purchase and assembly of land for development.
The CMA also warned that any scheme to enable more consumers to purchase homes (for example further stamp duty cuts or holidays, or special support for first-time buyers) which was not accompanied by supply-side measures would reduce the incentive for housebuilders to reduce prices.
Anti-competitive practices
During the study, the CMA found evidence that housebuilders may have been sharing commercially sensitive information. While it did not consider that this was an important factor in the persistent under-delivery of homes (which was the focus of the market study), it was concerned that it could be weakening competition and has now launched an investigation under the Competition Act 1998.
If the CMA ultimately concludes that one or more of the companies under investigation has breached competition law by sharing (or receiving) commercially sensitive information, it may impose a fine of up to 10% of that company's global group turnover, as well as securing the disqualification of directors. Just last month the CMA won a High Court challenge brought by a director disqualified for his role in breaches of competition law. Companies that breach competition law can also be sued for damages by any person who suffers loss as a result, including in group proceedings ("class action") claims, which might be brought by or on behalf of homebuyers.
While that investigation takes place, the central question for now is what governments decide to do next off the back of the CMA's conclusions and recommendations. Whether those recommendations lead to in limited reforms or substantial interventions, the CMA's report is a significant contribution to the ongoing debate of how the UK delivers the right number and quality of new homes.
If you would like any advice or support relating to any of the issues raised in this blog, please contact Charles Livingstone, Jamie Dunne, or your usual Brodies Housebuilding team contact.
