Why Britain’s housebuilding slump is about to get much worse
Melissa Lawford
5 min read
housing market
A damning report into the health of Britain’s housebuilding sector pulled no punches on Monday, as the competition watchdog raised concerns over decades of failure.
The list of criticisms directed towards developers was wide-ranging, as the Competition and Markets Authority (CMA) attacked shoddily built properties, excessive fees and inescapable management schemes.
Underpinning everything was a view that the quality of UK homes has fallen far short of where it needs to be.
However, beyond problems with individual businesses, the CMA stressed that a more structural overhaul is needed – which is something the regulator cannot achieve alone.
In an unusual move, the CMA called for “fundamental interventions that go beyond the way in which the housing market itself works” – as it specifically singled out Britain’s broken planning system.
The bottom line, the CMA said, is that too few homes are being built – particularly in places where they are needed most.
It laid out a series of recommendations, including clearer local authority targets and a more streamlined sign-off process, as CMA officials called for the Government to intervene on an issue that will dominate headlines in the run-up to the election.
It echoes a target laid out by the Conservatives in their 2019 election manifesto – one that has never been met.
Last year, Britain built 234,000 new homes, more than at any point in the previous four years but well below the Government’s 300,000 per year target.
The numbers are about to get much worse.
Between July and September, the number of housing starts – a key lead indicator for future completions – fell by 68pc compared to the previous three months and were down 52pc year-on-year.
Builders are cutting back amid new environmental regulations, the end of Help to Buy, and a broader downturn across the housing market overall.
The problem predates the current government, says Neal Hudson, founder of BuiltPlace, but the crisis has deepened.
“Their failure to significantly tackle the problem is probably the biggest one,” he says. “It’s pretty clear what needs to be done, but there has been an unwillingness to do it. We can see that in the flip-flopping on housebuilding.”
In December 2022, Housing Secretary Michael Gove U-turned on his planning reforms by watering down mandatory housebuilding targets. Despite this, developers have still been raking it in.
“The profitability of the 11 largest housebuilders has been generally higher than we would expect in a well-functioning market,” the CMA said.
Profits between 2013 and 2019 were particularly high, partly due to the boost from Help to Buy, which supported the sale of new homes from 2013 until last March.
The fundamental problem with Britain’s planning system is that it erodes competition, says Paul Cheshire, emeritus professor at the London School of Economics and a former government adviser.
It warps housing delivery in two ways, he says. It makes land much more expensive and it makes housing delivery slow and uncertain.
“The planning system drives up the price of land. Not just a bit but by orders of magnitude,” says Cheshire. “This is because land with planning permission is in such seriously short supply.
These factors mean Britain’s homes are increasingly built by a small group of very large developers, says Cheshire, essentially squeezing out smaller developers.
The CMA highlighted three key areas of concern in the planning system: uncertainty, the length and cost of the process, and the lack of clear objectives for local authorities.
It warned that these problems have a disproportionate impact on smaller developers. The largest 11 housebuilders in Britain built 40pc of all new homes in 2021-22.
The business model has also become increasingly driven by profits.
“More uncertainty means more risk and that means for any project to be viable, it needs to have a higher rate of expected return,” says Cheshire.
The majority of homes, more than 50pc in 2021-22, are delivered using a “speculative model”, the CMA said. This means housebuilders buy land in advance before they even know how much they will be able to sell the homes for.
That system has got steadily worse. The number of planning approvals granted between July and September last year was nearly half that at the end of 2016, official data shows. This has created a feedback loop, says Cheshire.
The planning system has put a constraint on supply, which in turn has pushed up prices.
The average home in 2022 was worth 8.16 times the average person’s salary, according to the Office for National Statistics (ONS). By comparison, a typical home in 2002 was worth little more than five times the average salary.
This then means they are more likely to object to planning proposals in their local areas.
Campaigners over the years have frequently pointed the finger at developers for driving up prices by “land banking” – meaning they purchase land and sit on it until the price goes up.
However, the CMA said this is merely a symptom of planning delays.
In response to Monday’s findings, the Home Builders Federation said it welcomes “recognition that the planning system is a fundamental barrier to delivery and adds unnecessary delay and cost to the development process”.
Given that both developers and the CMA are seemingly on the same side when it comes to planning, they are hopeful that politicians will push through an overhaul that could finally fix Britain’s housing crisis.
