Following a series of interactions between Michael Gove and the CMA’s Chief Executive last year, the CMA has now formally launched a market study into the housebuilding sector in Great Britain. The study formally commenced on 28 February 2023, and will be relevant to a range of stakeholders across the sector.
Shepherd and Wedderburn’s market leading regulation and markets team has extensive experience in dealing with CMA investigations, including acting for significant players in the CMA’s high-profile Energy Market and Leasehold Investigations, and advising clients on a range of cartel investigations.
In this article, we summarise the CMA’s proposals and next steps in this market study.
What are market studies?
Market studies are a formal tool available to the CMA under the Enterprise Act 2002. They are examinations into the causes of why particular markets may not be working well, taking an overview of regulatory and other economic drivers and patterns of consumer and business behaviour. Market studies may result in a more detailed market investigation – another statutory tool available to the CMA. Following an investigation, the CMA can make a wide range of interventions to correct any distortions of competition it identifies. High profile examples include the retail banking investigation and the energy market investigation – the latter resulting in the now ubiquitous energy price cap for domestic consumers.
As a first step in the process, the CMA has published a proposed scope for the study. Views from interested stakeholders are welcomed until 20 March 2023.
What is the CMA’s focus in the housebuilding market study?
The CMA’s study will focus on new homes to consumers in England, Scotland and Wales. The CMA’s objective is to obtain evidence and carry out analysis that will enable it to:
- Understand the market structure, the relationships between key participants, and other aspects of the way the industry operates, at each key stage of the housebuilding process.
- Establish whether there may be market distortions in the supply of new homes.
- Explore and seek to measure, where possible, whether and to what extent any of the competition issues that the CMA identifies may lead to consumer harm - by looking at prices, profitability, quality, and innovation in the sector.
The CMA has a statutory time limit of 12 months to undertake the study and publish a report. As such, the CMA must be careful to define its scope, given this limitation. The proposed scope doesn’t cover aspects such as the merits of the Government’s housing targets, or question wider issues with the planning system which might impact the market, or other policy choice restrictions on housebuilding such as the preservation of green belts.
Despite this, the scope of the study is extensive, covering a range of different topics that will likely involve a significant data gathering and engagement exercise across the industry.
The study will largely focus on the supply side of the housing market, although the CMA will examine some issues around buyers at different stages in the housebuilding process.
CMA’s focus – Assessment of potential distortions of competition – Further details
The CMA’s scope identifies three broad areas where it will examine whether there are potential distortions of competition, as follows:
1 – Whether the behaviour of any market actors leads to unnecessary costs or market distortions
The CMA proposes to look at six aspects, including:
- examining issues with outline planning conditions (and how land promoters might agree to ‘undeliverable’ outline planning conditions);
- interactions between pricing in the land market and the planning process, and whether this distorts housebuilders’ incentives;
- whether local authorities are incentivised to rely on large developers over smaller ones (and whether that impacts the market);
- whether planning authorities’ influence and bargaining power on planning conditions is diminished as a result;
- whether there are more general, unnecessary costs and delays in the planning process arising from the competing incentives of different actors (e.g. local authorities, housebuilders, or land promoters); and
- whether the roads/amenities adoption process operates with the right incentives.
A notable aspect missing would appear to be the influence of utilities services providers such as water, telecoms, gas and electricity.
2 – Whether buyers at different stages of the housebuilding process can exercise effective choice given the level of transparency at key stages in the process
The CMA propose to look at three aspects, including:
- transparency in the land market and relationships between landowners and intermediaries (noting that land is not always openly marketed for sale);
- transparency of estate maintenance charges and obligations; and
- the transparency surrounding the appointment of estate management companies.
3 – Finally, the CMA will explore whether there is effective competition between housebuilders
Here the CMA will consider three aspects, including:
- whether housebuilders face weak competition at point of build-out (which will require the CMA to understand the concentration of the housebuilder at a local, granular level);
- whether established housebuilders control of large land banks leads to exclusion of other builders and strengthening of market positions; and
- whether there are barriers to entry and expansion limiting competitive pressures on volume housebuilders and diversity in the housebuilding sector, and whether they may be higher than one might expect in a well-functioning market.
As part of the final aspect above, the CMA intends to examine whether local authorities might favour certain categories of housebuilders through their process, whether planning or regulatory requirements (or lack of resourcing) may impact local authorities activities and so incentivise them to favour larger housebuilders, and whether limited access to essential resources such as land, labour and materials, and finance, may disproportionately impact housebuilders.
Assessment of potential consumer detriment
The CMA also plans to analyse the outcomes of the competitive process for consumers. This will look at the supply (volume of new homes, including affordable homes), choice, quality, and innovation. The CMA will also consider pricing and profitability in the market. The CMA will not seeks to assess what the ‘right’ price is, but rather seek to understand the way in which prices are set by housebuilders and how this may be affected by (a) the price of land and other inputs; (b) projections made when the development is first conceived; (c) local market conditions at the time of construction.
Geographic scope and nature of the market – Northern Ireland
Interestingly, the CMA will not be looking at Northern Ireland as part of the study. The CMA makes reference to, amongst other things, the nature of the market (characterised by SME housebuilders) and the pace of housebuilding on Northern Ireland since the financial crash of 2008.
The CMA however does consider that certain outcomes appear to be “better in Northern Ireland than in the rest of the UK”.
This aspect of the scope, together with the various themes emphasising market power/size of housebuilders, seems to suggest that the CMA is particularly interested in the concentration of larger housebuilders, and whether that is the causing any wider issues in the GB housebuilding market.
Next steps
Interested parties have until 20 March 2023 to make representations to the CMA on the proposed scope of the market study.
With the issuing of the formal Market Study Notice on 28 February, the CMA can now make use of its compulsory information gathering powers, and will now commence its engagement with stakeholders.
Market players and others with an interest in the industry should make themselves aware of the market study’s scope, including the 25 consultation questions at page 26.
Of course, if you have any questions or would like further advice, our expert team would be delighted to help.