Unpacking the dysfunctional mess of Britain’s housing market: Matthew Brooker

In a scathing report, the Competition and Markets Authority (CMA) exposed the dysfunctional state of Britain’s housing market. The probe into eight major homebuilders revealed a sector plagued by inadequate supply, soaring prices, and questionable quality. The CMA’s findings point to longstanding government failures in achieving housing targets and highlight developers’ profit-maximising tactics. While proposing remedies, the report underscores the need for substantial intervention and a shift in industry incentives, ultimately leaving the challenging task of reforming the housing market back in the government’s hands.

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By Matthew Brooker

Britain’s housing market is dysfunctional, delivering too few homes at prices that are too high and at quality levels that are often questionable, with buyers having limited sources of redress and often locked into paying high private-management fees for inadequate services. Just don’t expect a regulator of companies to fix what government is failing to address. 

The Competition and Markets Authority opened an antitrust probe into eight large homebuilders for information-sharing, ensuring that its yearlong study of the industry concluded with appropriate fanfare. Shares of the eight fell, led by intraday declines of more than 4% for Taylor Wimpey Plc and Persimmon Plc. The more significant takeaway from the CMA’s final report, though, is the damning picture it painted of Britain’s new-build housing market, whose structural challenges extend well beyond some possibly anti-competitive behavior by the leading developers.

Little of this will be news to homebuyers or to those who have tracked the government’s persistent failure to achieve its 300,000-a-year housing target. “Overall, the housebuilding market is not delivering well for consumers and has consistently failed to do so over successive decades,” the CMA said, providing independent confirmation of what is obvious to many. Most homebuyers already avoid the new-build market because of its well-documented quality issues: Only 33% would consider buying one, according to research by the Home Builders Federation, the trade body for big developers. 

The CMA began its market study at the behest of Housing Secretary Michael Gove, who has inveighed against ugly, defect-ridden cookie-cutter estates churned out by the major housebuilders. The regulator’s report in effect punts many of the most intractable issues back to the government, where they surely belong. 

One key area that it examined, for example, was “land banking” by big developers — the practice of stockpiling reserves for future use — and whether this was restricting the supply of plots available to smaller builders. After examining more than a million sites, the CMA judged that land banking was more a symptom of Britain’s complex and unpredictable planning process than a cause of the housing shortage.

There’s a telling statistic in the September 2023 submission from Taylor Wimpey, showing an increase in the company’s strategic land pipeline to about 140,000 plots from 80,000 in the 11 years through 2012, and a corresponding decline in the percentage of planning applications decided within the statutory time frame, to about 20% from 60%. A longer planning process requires a bigger land bank to sustain output at the same levels, so it can be argued that housebuilders are only being rational in adding to their reserves.

That isn’t to say that developers play no part in contributing to the home shortage. Instead of building houses as quickly as possible, companies are incentivized to control their build-out rate to a level that maintains selling prices, the CMA says. The regulator found that excluding the period during and after the global financial crisis, the profitability of the 11 largest housebuilders has been “generally higher than we would expect in a well-functioning market.” This again relates to the issues of land supply and the planning system.

As profit-maximizing operators with a duty to shareholders, developers can’t be blamed for working the system to their advantage — to the extent that they play within the rules (note that the regulator said it didn’t consider information-sharing to be a main factor in the under-delivery of supply). If the game’s setup produces socially undesirable results, then the incentives need to change. But it isn’t the job of the antitrust watchdog to redesign the planning system.

Besides delivering inadequate supply, the industry has been slow to innovate and adopt modern methods of construction, which are less labor-intensive and more energy-efficient. “Substantial intervention” is needed, the CMA said, providing a list of recommendations from requiring councils to adopt amenities on all new housing estates to setting up a New Homes Ombudsman — none of which are part of its remit to provide.

The existence of housebuilding targets is itself arguably evidence of market failure. Britain has no target for red Volvos, for example, and “yet we seem to have enough of them,” as Richard Bacon, a Conservative member of Parliament who published a government-commissioned review of the self-build and custom housebuilding market in 2022, observed to me. In a perfectly competitive market, supply can be expected to rise to meet demand, with prices adjusting accordingly. That’s prevented from happening in property by the structural impediments to supply.

The result is a gap between housing need and demand. Developers respond to demand, and understandably slow production when conditions deteriorate. But the same number of people still need housing of a certain standard, even if they are unable to afford the private market. Meeting this need is economically necessary if the nation is to sustain the health, educational levels and productivity of the population.

The CMA notes pointedly that housebuilding has only reached the levels currently identified as necessary when local authorities were contributing significant supply. The era of large-scale social housing construction ended with Conservative Prime Minister Margaret Thatcher more than three decades ago. A return is hard to imagine as long as her party remains in power. But might it happen under a future Labour government? Here’s hoping.

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