The Office of Fair Trading (OFT) announced on the 22 June that it is to launch a ‘groundbreaking’ study into the UK housebuilding market. This has caused considerable speculation over the possible outcome for the UK’s housebuilders. Early comment from developers is broadly positive, anticipating a focus on a slow planning system that many consider not fit for purpose.

But does the OFT’s announcement merit such optimism? Below, we consider the scope of the OFT’s study, the procedures to be followed and the implications for housebuilders and other market players. Why has the OFT embarked on a market study?

The OFT is concerned that the market for housebuilding is not working to the consumer’s benefit. There appears to be an inadequate supply in spite of rising prices, low quality and a lack of innovation.

In particular, the OFT is disappointed with the industry’s response to the Barker Report of March 2004, which called for an increase in levels of customer satisfaction and a code of conduct for new house sales.

What aspects of the market will the OFT examine?

The OFT has revealed three principal areas it will focus on:

  • The extent to which consumers have the power to drive competition - the OFT is concerned about possible “information asymmetries” between consumers and housebuilders.
  • The level of consumer protection and redress - the OFT will consider consumer legislation and building regulation standards and how well they are enforced. The OFT will also assess whether new home warranties adequately insure homebuyers against poor quality housing.
  • The extent of competition in housebuilding - the OFT will focus on barriers to entry and expansion, scarcity of key inputs, the effect of land banks and whether available land is being effectively brought through the planning process in a timely manner. In particular, the OFT is concerned that there is often a long delay between land being zoned or receiving planning approval and being brought to market. It wishes to better understand why these delays exist and how the market can respond better to changes in demand.

How will the market study proceed?

The OFT will start a preliminary review by contacting a wide range of specific industry and consumer bodies, businesses, government departments and independent experts, to seek views and evidence. It also welcomes initial written submissions, by 17 August 2007.

Further steps may include:

  • the issuing of detailed questionnaires;
  • meetings, structured interviews and telephone surveys; and
  • ‘mystery shopping’ exercises to gauge how the market works for consumers.

The target completion date of mid 2008 will be clarified after the preliminary review.

What are the possible outcomes?

  • Clean bill of health - no further action required;
  • Publication of information and media interviews - to encourage better consumer purchasing decisions;
  • Encouraging voluntary action - the OFT may simply make recommendations to the firms involved;
  • A consumer code of practice - to establish an independent mechanism for considering complaints by consumers;
  • Recommendations to the government or other sectoral regulators - to make changes to the law or regulatory practice;
  • Investigation and enforcement action - for breach of competition law or consumer protection legislation; or
  • Market investigation reference to the Competition Commission - the OFT does not rule out this option, which could take up to two years and lead to further remedies.

Comment

Developers’ predictions that the study will focus on the planning system could be well founded. But this may not be the whole story. It is interesting that the OFT has identified land banking as a potential issue for concern.

Land banking has already proved a central aspect of the Competition Commission’s current investigation into the supermarkets sector. It is alleged that certain supermarkets hold back strategic sites to prevent them falling into competitors’ hands. The largest housebuilders may also be required to provide considerable detailed evidence to the OFT in this area. Construction is one of the OFT’s priority sectors. In recent years it has carried out dawn raids and fined numerous construction companies for anti-competitive practices. Representing around one third of construction activity, the UK’s private housebuilding market is worth £20 billion a year. The OFT will therefore be keen to identify and remedy consumer detriment in this sector.

Whether these remedies will ultimately benefit housebuilders and other market players, alongside consumers, remains to be seen. But a rigorous and wide-ranging examination of the sector may be expected