Earlier this year, the government launched an investigation into whether the largest housebuilders limit competition. Last week, it said it found evidence they do.
It is quite the admission. The major housebuilders are almost all listed, and four are in the FTSE 100, so the Competition and Markets Authority’s (CMA) findings have big implications for the equity market. After all, while there have long been fears that large housebuilders operate like a cartel, using their 90 per cent market share as leverage, it is eyebrow-raising for the official competition watchdog to say it has found evidence to support those fears.
Indeed, the full update on the CMA’s housing sector probe launched earlier this year is well worth a read, with evidence of lousy behaviour from landlords, estate agencies and councils, as well as housebuilders.
First, the CMA said there is evidence that housebuilders' large and growing land banks “may be limiting competition or slowing build-out rates in some areas”.
As we have previously noted, housebuilders build to market demand rather than societal need, which means they intentionally slow down build-out rates when demand is low. That is widely accepted. What is not is that it could amount to “limiting competition” because of their market influence. Analysts have argued that it does not because there is a large liquid market of older homes in the UK, which can facilitate demand if housebuilders sit on their land banks, but the CMA says there is evidence to the contrary.
Housebuilders are not the only ones considered at fault. There is also evidence that some councils are not providing basic services – such as road maintenance or even street lighting – on some housing estates built over the past five years, allowing private companies to charge extortionate and uncapped fees for these services instead. Some homeowners told the CMA the situation has made it nearly impossible for them to sell their homes.
A desperate lack of resources is to blame here. The CMA heard some councils were happy with the arrangement as it allowed them to charge council tax to residents without providing services. Another said local authorities simply don't have the funds to provide the infrastructure. That is what the community infrastructure levy and section 106 powers are supposed to be for, but evidently, something has gone badly wrong.
Housebuilders and the planning system are not the only things in the firing line. The CMA also worries that “a significant minority [of landlords and letting agents] are not complying with consumer protection law”. It says the pressure selling of zero-deposit schemes, the use of sham licences rather than assured tenancies, and onerous guarantee clauses are some of the practices it is worried about from landlords and letting agents who are collaborating in an anti-competitive way. Buy-to-let landlords should take note.
The CMA has written to the housing secretary about these issues. It will post some updates in the autumn, and the full report in February next year. It’s worth noting that the CMA has pushed the housebuilders to change their behaviour before, as it did with leasehold selling. But what is needed to fix this mess is some government intervention as well.
