Homebuilding in the UK A market study September 2008 OFT1020 © Crown copyright 2008 This publication (excluding the OFT logo) may be reproduced free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as crown copyright and the title of the publication specified. CONTENTS Chapter Page 1 Executive summary 5 2 Introduction 12 3 Overview of the homebuilding industry 20 4 Competition in the homebuilding industry 44 5 Land supply and landbanking 103 6 Consumer protection 135 7 Remedies 158 8 The future of the homebuilding industry 169 Annexe A List of consultees and contributors B Consumer survey C Mystery shop D Homebuilders' survey E Finance study F Case studies G Review of the legal framework H Review of alternative dispute resolution I Regulation affecting the industry J Warranties report K Review of the homebuying process L Comparison of consumer satisfaction surveys M Consultation with stakeholders N Comparison of housing market areas and LPA boundaries O Calculation of residual land values P Planning permissions database Q Analysis of LPAs with high concentration R Alternative development models S A planning appeal case study: Wealden T Homebuilding and land use U Land ownership databases V Land ownership data sources W Land ownership profiles by type of homebuilder X Glossary 1 EXECUTIVE SUMMARY 1.1 A well functioning new homebuilding market in the UK is crucial - both for the thousands of homebuyers who buy a new home every year and for the health of the wider UK economy. Despite the recent downturn in the general property market and in the market for new homes, the homebuilding industry in the UK remains large. During 2007 just under 194,000 new homes were built in the UK, representing sales of around £45 billion. 1.2 Before 2007, the homebuilding industry enjoyed a period of significant growth, characterised by the increasing price of land and homes, and fuelled by strong underlying demand and the ability of homebuyers to borrow many times their earnings relatively cheaply. But this steady rise in the price of homes did not appear to be matched by a steady increase in the number of homes being built by homebuilders. As a result, some commentators questioned whether there might be competition problems in the industry. 1.3 We launched this study into the state of competition and the effectiveness of consumer protection in the homebuilding industry just before activity in the wider property market and the new homebuilding industry began to slow, and then enter a severe downturn. In 2008 we saw major reductions in the share price of listed homebuilders and a sharp decline in the number of homes being built and sold. So we were able to observe at first hand the realisation of many of the risks that homebuilders face, and must accommodate in their business models, even in better times. 1.4 Our study was launched partly in response to the suggestion that competition problems might lie behind the sluggish response to rising prices, and partly in response to the 2004 Barker review. This expressed concerns about the level of consumer satisfaction with new homes and recommended that the industry should increase levels of homebuyer satisfaction by developing a code of conduct. Later, the Callcutt review recommended that, subject to a two year notice period and special arrangements for new entrants and small firms, the Government and OFT1020 5 public agencies should cease dealings with any homebuilding firm which did not meet a predetermined standard of customer satisfaction. 1.5 This report presents the Office of Fair Trading's assessment of competition in the delivery of new homes. The results from our survey of new homebuyers, our mystery shopping exercise and many interviews with individual homebuilders are central to our competition assessment – a well functioning market for new homes should deliver homes which are fit for purpose and are finished to a level expected by the homebuyer. Key findings 1.6 Our study found little evidence of competition problems with the delivery of new homes in the UK. The evidence points towards a conclusion that homebuilders in the UK compete for sales against each other and existing homes – that is, while some homebuyers may wish to buy only a new home, many consider buying either a new or existing home, and so the price of existing homes and the price of new homes constrain each other. 1.7 We found no evidence that individual homebuilders have persistent or widespread market power or that they are able to restrict supply or inflate prices. On rare occasions an individual homebuilder may find that it is temporarily the sole provider of a particular type of housing in a local market, but these examples appear to be scarce and account for a small fraction of the total supply of new homes. 1.8 Having a stock of land helps a homebuilder cope with fluctuations in the housing market and also helps to reduce its exposure to risk resulting from the planning system. We have not found any evidence that homebuilders have the ability to anti-competitively hoard land or own a large amount of land with planning permission on which they have not started to build. Apart from the homebuilding firms, the available information suggests that the largest 'landbank' may be that held by the public sector. Homebuilders are, to some extent, constrained by the availability of suitable land. If the Government and devolved administrations wish to ease this constraint going forward then one potential way of doing this would be to make more public sector land, OFT1020 6 which is suitable for development, more readily available to homebuilders. 1.9 Small homebuilders and individuals building their own homes will build on smaller sites which the larger homebuilders will not take on. Without the smaller homebuilders and self build some sites would simply remain undeveloped. The UK lags behind other countries in the number of self build projects. In terms of ensuring that land which is already available for homebuilding is used efficiently and output maximised, it is important to maintain a vibrant small and self build sector. 1.10 While the homebuilding industry largely has a clean bill of health in terms of competition, this does not mean that there are no problems at all. Many homebuyers experience some faults with a new home, many of which are quickly fixed, but some homebuyers experience significant detriment, distress and inconvenience that comes with major, or many, faults in a new home. 1.11 In a competitive market, all other things being equal, a product that delivers a higher level of customer satisfaction will be expected to outsell a product with lower customer satisfaction. This outcome can only be expected, however, when consumers are readily able to discern how good the product is before they purchase it. Homebuyers are not able to accurately assess the quality of a new home in advance of purchase and the – perhaps overwhelming – importance of price and location means that homebuilders may not compete as fiercely as they might on some aspects of quality and customer service. 1.12 While overall financial consumer detriment from faults, poor customer service and moving in delays is relatively low compared to the size of the industry, it is not insignificant in absolute terms. We have not, however, attempted to put a financial figure on distress and inconvenience which for some homebuyers at least will be considerable. Buying a home is, of course, the biggest investment that many people will ever make and when things do go wrong, homebuyers quite literally live with the results. Many homebuyers will experience a relatively low level of annoyance waiting for small faults to be fixed. But some homebuyers, in addition to financial detriment from the loss of facility, will experience OFT1020 7 considerable distress living – sometimes for long periods – with faulty plumbing, heating and the failure of other functional items. 1.13 The sales process for a new home also is not without problems – we have concerns around reservation fees, the clarity of information provided to homebuyers, and we consider some of the terms and conditions in many contracts used across the industry may potentially be unfair. 1.14 Looking to the future, new regulations and standards such as the Code for Sustainable Homes may bring with them new challenges for homebuilders – in particular for smaller firms who may struggle, without assistance, to meet the requirements and to implement new technological solutions. In addition, it may be the case that as homebuilders adapt to the new standards there will be a transition period in which snagging and faults with new homes increase rather than decrease. 1.15 The recent downturn in the housing market coupled with the impact of the 'credit crunch' is likely to result in a significant reduction in the number of homes built in the short term and a reduction in capacity of the homebuilding industry. The likelihood is that once the market begins to improve there will be a substantial time lag before there is sufficient capacity in the industry to once again build homes at 2007 rates. Key recommendations 1.16 We published much of our evidence and background reports in advance of this final report to allow our stakeholders to comment on, and contribute to, our findings. During the course of this study, the industry acknowledged the concerns that we raised around problems with the finishing of some new homes and aspects of the sales process. 1.17 The following organisations have said that they are now committed to the introduction of a code of conduct which meets the consumer protection concerns raised in this report: • Construction Employers Federation (NI) OFT1020 8 • Council of Mortgage Lenders • Federation of Master Builders • Home Builders Federation • House Builders Association • Homes for Scotland • LABC New Home Warranty • National House Building Council • Premier Guarantee • Retirement Housing Group (of The Home Builders Federation) • Zurich Building Guarantee 1.18 Four years ago the Barker review called on the industry to develop a code of conduct and seek OFT approval for that code.