Recommendations and a new antitrust investigation: the CMA's final report on its housebuilding market study

In February 2023, the CMA launched a market study into the housebuilding sector in England, Scotland and Wales. Following its initial work, the CMA published an update report on 25 August 2023 and consulted on its proposal to refer the sector for a full market investigation, only after which would the CMA be able to impose legally-binding remedies: see our previous briefing. 

In its recent final report though, published on 28 February 2024, the CMA decided that a market investigation is not the most effective way to address its concerns in the housebuilding sector. Rather, recognising the complexity and sensitivity of the sector as a policy issue, the CMA considers Government action to be a more appropriate and comprehensive response to the market-wide issues that the CMA has identified in the sector.

The CMA has confirmed that it stands ready to engage with policymakers, housebuilders, and others to explain its recommendations, options and wider considerations for the sector. The outcome will therefore be policy led – with implementation required by Government – rather than a competition led process run by the CMA itself. 

Despite consulting on opening an in-depth market investigation, there is nothing unsurprising about the CMA's final decision taking a different direction and settle on non-binding recommendations only.

At the consultation stage, the CMA stated that it considered the legal test for a reference to a full market investigation to be met in relation to two of the four areas of the CMA's focus: (1) land banking; and (2) estate management. However, at several places in its interim report, the CMA referred to the possibility of the problems identified being appropriate addressed by reforms to the planning system and legislative/policy reform (rather than requiring a full market investigation).

So why did the CMA opt to open a market investigation? The CMA noted at the time that, whilst it further considered its views on the appropriate action, it had in effect been required to launch the consultation due to a ruling of the UK Competition Appeal Tribunal (CAT) that stood at the time (Apple v CMA).

The CMA's final report sets out six issues of concern regarding the ways in which the housing market current operates:

2.1 The supply of new homes across the country persistently falls below Government targets and other assessments of need, as well as being highly cyclical.  There are significant shortfalls between the level of housing delivery and the level of housing need, plus regional variations in delivery levels, with London, the South East and the East of England being the worst affected.

2.2 The CMA is concerned about the potentially high levels of profits that housebuilders can make, although they indicate that this factor alone does not indicate the need for intervention.

2.3 The CMA saw evidence of high rates of unresolved defects and snagging items in new homes.  It seems that there is a small but significant minority of purchasers who experience the most serious defects and who are likely to experience significant consumer detriment.

2.4 One of the signs of a well-performing market is innovation, but the CMA saw lower levels of innovation than would be expected, and felt that the sustainability-related innovation that does take place is driven by fear of impending regulations rather than as a response to pressure from investors or consumers.

2.5 The CMA detected consumer detriment as a result of the ways in which public amenities on housing estates are managed by private management companies, including some households being unable to switch managing agent; unacceptably high and non-transparent charges; poor quality amenities and management services; and disproportionate sanctions for any outstanding charges.

2.6 Most notably for the UK's largest housebuilders, the CMA is, however, no longer concerned about land banking.  This is a "symptom" of the problems with the market rather than a cause, given, for example, the length of time that it takes to obtain a planning consent.  The CMA also found that while smaller housebuilders may face some disadvantages in being able to buy development land compared to larger housebuilders (which typically hold large amounts of land), this discrepancy does not materially distort the market. In fact, "artificially reducing the levels of land banks" could have a negative impact on house delivery, particularly if underlying issues regarding planning remain unaddressed.

The CMA has identified six main factors behind the problems set out above:

3.1 The CMA considers that the planning system does not deliver enough planning permissions to deliver the required number of new homes, and that in particular there are problems with a lack of predictability in the outcomes of an application; the length, cost, and complexity of the planning process; and a lack of clarity, consistency and strength of targets, objectives and incentives within the planning system. The CMA also thinks that these problems in the planning system may be having a disproportionate impact on SME housebuilders.

3.2 The CMA concluded that housebuilders build fewer homes than we need because their profits are maximised if they build out in accordance with the local absorption rate rather than as quickly as possible.  This is rational corporate behaviour but does not lead to the number of new homes per year that the country needs.

3.3 There are a number of barriers to entry and expansion that could be restricting SMEs' ability to operate in the market, particularly the difficulty of negotiating the planning system and problems with accessing land.  The CMA suggest that this may adversely impact the variety of new build houses, both in terms of the aesthetics of the houses produced and in producing more niche housing types.

3.4 There is insufficient competitive pressure within the housing market to drive up the quality of newbuild housing.  The CMA suggest that this is because quality is hard for consumers to assess prior to purchase.

3.5 There are a number of reasons for the increasing prevalence of private management arrangements on new build housing estates, such as the discretionary nature of the systems which govern the adoption of facilities by local authorities, and the financial motivations behind housebuilders deciding not to seek adoption and local authorities being unwilling to adopt amenities. The CMA believes that this situation is unlikely to improve without Government intervention.

3.6 The CMA has also seen evidence that some housebuilders may be sharing competitively sensitive information about sales prices, incentives, and rates of sale with each other.  Although the CMA does not consider this to be one of the main factors behind the sector's disappointing build rates, it has decided to launch an investigation under the Competition Act 1998 into this suspected conduct on the basis that it may weaken competition in the market.

4.1 Management of estates by private companies

The CMA has decided not to make a market investigation reference in relation to the private management of public amenities.  However, its report sets out several recommendations in this area:

4.1.1 Government should take steps to stop the increase in private management arrangements on new housing estates by, for example, prohibiting the establishment of new embedded management arrangements.

4.1.2 Government should provide greater protection to households living under private management arrangements, by for example introducing enhanced consumer protection measures plus a robust enforcement regime.  Consumers should be able to challenge charges and get redress if appropriate – the CMA considers that the principles set out in its report go further than the form of the Leasehold and Freehold Reform Bill currently in Parliament, in particular regarding increasing transparency requirements relating to information provided prior to sale, and providing freeholders with broader rights to switch service provider on a no-fault basis to ensure they can readily seek more competitive offerings.

4.1.3 The CMA also recommends the provision of guidance to members and directors of residents' management companies to support and enable them to effectively manage the amenities on their housing estates.

4.1.4 In order to increase the rates of adoption of public amenities on housing estates, the CMA recommends that Government implements common adoptable standards for public amenities on new housing estates and/or mandatory adoption of public amenities on new housing estates by local authorities, with limited exceptions.

4.2 The quality of new housing

In order to protect consumers from poor quality housing, the CMA recommends that:

4.2.1 Government should ensure that housebuilders should be held to a consistent set of quality standards, which are met and maintained.  This would involve developing and approving a single mandatory consumer code for all UK housebuilders, and activating the New Homes Ombudsman Scheme.

4.2.2 In order to assist consumers to fully understand the true price of their new home, Government should prohibit the "drip pricing" of mandatory elements of a new home, as well as other charges that are ‘optional’ but likely to apply, and that any genuinely optional extras and their prices are prominently and fully disclosed alongside the headline price.

4.3 Reform of the planning system

The CMA's report indicates that the most significant problem in delivering new homes at volume is the current planning system.  Problems include the large number of local authorities which do not have local plans in place.  The report also finds that planning delays and complexities have a “disproportionate impact on SME housebuilders”. The possible solutions set out in the report include:

4.3.1 Some options for reforming the planning system to make it more predictable, cheaper, streamlined and more straightforward to navigate. These involve making more objective and effective use of targets, introducing more effective monitoring and enforcement of local plans, and streamlining the planning system.

4.3.2 Clearly defining and rationalising statutory consultees, and imposing more effective monitoring and enforcement of deadlines for statutory consultees.

4.3.3 Raising planning fees to a cost-reflective level and ringfencing them, and also providing additional support for SME housebuilders.

For housebuilders

In terms of the Competition Act investigation, it will be several months (or longer) before the CMA has gathered all of its evidence and reaches a view on whether it provisionally considers competition law to have been broken (if it does then, at this point a 'statement of objections' would be issued to the parties under investigation, who would then have the opportunity to provide further representations to the CMA on the case).  The parties to that investigation, and interested third parties who may be contacted by the CMA to provide information relevant to the investigation, should take specialist competition law advice.

In terms of the recommendations made in the market study final report, it might be advisable in future schemes to maximise opportunities to have amenities adopted by the local authorities or, where this is not possible, to construct such amenities to an adoptable standard.  To the extent that estate amenities will be managed by management companies, it would be prudent not to set up any new embedded management arrangements, but rather to put in place contracts in which the managing agent's charges must be transparent and cost-reflective; its services must meet an agreed service level; any sanctions for non-payment should be reasonable and proportionate to the breach; householders must be able to replace the agent if they so wish and must be able to challenge charges or sanctions; and the agent must assist householders to gather sales packs when they sell their homes.

For investors and housing providers who have purchased homes from any of the housebuilders named above

Investors and housing providers which have purchased completed housing units from any of the eight housebuilders in question may have concerns that they have been harmed (for example through artificially inflated prices) if the seller has indeed been distorting the market through anti-competitive exchanges of information with its competitors.  Those who consider they may have been harmed (if anti-competitive behaviour is ultimately proven) should consider their options now, including the potential for seeking redress through the courts.

For consumers

Consumers will be relieved to read that their experiences in the housing market have been taken seriously by the CMA, but may be frustrated by the gap between the CMA's recommendations and the current provisions of the Leasehold and Freehold Reform Bill.

For land promoters

The CMA looked into the question of whether the involvement of land promoters in the housing market had any negative impacts on its functioning.  They found no evidence that promoters delay the sale process after obtaining planning permission, and have limited scope to do so due to the contracts they operate under.

For managing agents

The CMA's report was very critical of the way in which some private management companies have been managing housing estates with shared amenities.  Agents working in this area will already be preparing for the changes set out in the forthcoming Leasehold and Freehold Reform Bill.  They should also consider how best to voluntarily meet the recommendations for consumer protection set out in the CMA's report.