UK: Recommendations And A New Antitrust Investigation: The CMA's Final Report On Its Housebuilding Market Study

The Competition and Markets Authority (the CMA) has now concluded its year-long, market-wide study into the housing sector, examining possible competition law or consumer protection issues prevalent across the industry. It looked at a range of issues impacting competition between housebuilders – including land-banking, planning, the involvement of intermediaries, and estate management. In its final report, published last week, the CMA expressed "fundamental concerns" with UK housebuilding sector, highlighting consistent undersupply of new homes. But it ultimately concluded that the possible competition issues it studied did not merit further in-depth investigation. Most notably for the UK's largest housebuilders, the CMA found that land-banking is a symptom not a cause of problems within the market, whereas the planning system is at the root of many of the problems with housing delivery. In so doing, the CMA has issued a broad range of non-binding recommendations which places the onus back on policy-makers to respond. Separately, but based on evidence found during the market study, the CMA has also opened a new competition law investigation into whether eight of the largest housebuilders have been exchanging information in an anti-competitive way.

CMA settles on non-binding recommendations only – no in-depth investigation

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 powers under the Enterprise Act 2002 to conduct inquiries into the workings of a market. The framework is a two-stage one: a preliminary market study (lasting for 12 months), followed by an in-depth market investigation in cases where the CMA considers there to be reasonable grounds to suspect that a feature (or combination of features) of a market in the UK prevents, restricts or distorts competition. Importantly, the CMA can only impose legally-binding orders mandating market change following the conclusion of an in-depth market investigation. Whereas, following a market study, it can issue non-binding recommendations only.

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 CAT found that, where the CMA decides 6 months into a market study not to make a market investigation reference in respect of a particular aspect, it cannot, in light of subsequent evidence or developments that may come to light in the second half of the market study, revisit that decision. Whilst the Court of Appeal subsequently overturned the CAT's judgment (on 22 November 2023) – upholding the CMA's decision to later revisit a decision not to make a market investigation (in that case in the CMA's market study into mobile browsers and cloud gaming) - this appeal judgment came after the CMA's (interim) report on housebuilding The (now-overturned) CAT judgment therefore would have inevitably led the CMA to take a more over-inclusive approach to the aspects covered by its proposal to make a market investigation reference in the housebuilding market study.

Issues identified in the CMA's final report

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.

What does the CMA think has caused these negative aspects of the UK's housing market?

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.

According to the CMA, the suspected exchanges of information by the named housebuilders could be influencing the build-out rate of new sites and the prices of new homes.

It may be some time before further information on the course of this investigation is published, as the CMA's website indicates that it will continue to gather further information until December 2024.

Whilst the market study/market investigation process does not itself enable the CMA to make findings of anti-competitive conduct against, or to impose financial penalties on, individual firms (with the consequential risks of private actions for damages and/or director disqualification), the opening of this separate Competition Act investigation serves as a useful reminder that markets work can in some cases expand into competition law enforcement. Firms within the scope of the CMA's markets work can subsequently find themselves under investigation for suspected competition law breaches where evidence is uncovered to cause the CMA find reasonable grounds to suspect that the Competition Act prohibitions on anti-competitive agreements (or abuse of dominance) have been broken.

What solutions does the CMA suggest?

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.

Overall, there is nothing particularly new or surprising in the CMA's diagnosis of the ills of the planning system. Familiar issues were identified, notably the unpredictability, length and cost of obtaining permission. These continue to remain as barriers to delivery despite recent tinkering by the Government. Clearly, more radical reform is needed to create a step change in approach. Crucially though, for such reform to be effective, another identified issue must also be addressed - the lack of adequate LPA resourcing. Again, this is an age-old problem yet to be properly tackled.

Interestingly, the CMA identified a link between incentivising developers to diversify the tenures and types of homes delivered, and an increase in build out rates. Again though, this is not new – back in 2018 the Letwin review highlighted the need to diversify the type and tenure of houses on offer. Yet, over 5 years later, this still remains an issue.

Lastly, the CMA also recognised the important role that local authorities and housing associations can play in delivering new housing. Leaving it to the private sector alone will never be sufficient and delivery at scale requires the right conditions to facilitate both public and private sector involvement.

Conclusion – what does the report mean?

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.

This market study is not the only way in which the CMA has been analysing competition in the real estate sector. The CMA is also reviewing the recommended all share offer for a tie-up between Barratt and Redrow under its merger control rules. The merger control review is separate to the market study and the recently opened Competition Act Investigation – under its merger control functions the CMA will focus on whether the specific combination of Barratt and Redrow may be expected to result in a 'substantial lessening of competition' within the UK. However, the wider context of the study's findings and the recently opened investigation may well come into play to the extent that those aspects cause the CMA to find competition issues from increased consolidation in the sector.

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 it 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.