Corporate report

Update on work in the housing sector

Published 25 August 2023

Introduction

The CMA’s purpose is to promote competitive markets and tackle unfair practices, with a particular focus on areas where people spend the most time and money, and on those people who need help the most. In our Annual Plan we identified having somewhere to live as a continuing area of focus for the CMA.

The functioning of the housing market has a significant impact on the finances and living conditions of almost every person in the UK. This impact is particularly significant at a time when the price of other essentials, such as energy, food and other groceries, and road fuel has increased. Office for National Statistics research ^{[footnote 1]} published in June 2023 found 35% of UK adults reporting that it was difficult to afford their rent or mortgage payments. For many households, paying their rent or mortgage is their biggest monthly expense. Renters are currently spending on average 21% of their disposable income on rent, and mortgage holders spending 16% on their mortgage and for some people these proportions are much higher.

There is currently widespread concern about how well various aspects of the housing market are working. Many of the issues driving this concern are intrinsically linked to legal and policy frameworks and are not within the CMA’s sole or direct remit to resolve. But we are determined to ensure that ineffective competition or unfair business practices are not increasing costs, limiting choice or reducing quality.

Recent important CMA work relating to where people live includes our action to remove doubling ground rent clauses in leasehold contracts, obtaining refunds for thousands of leaseholders, and our ongoing scrutiny of consumer protection concerns in home energy efficiency and green heating systems. Alongside this, in February this year, we extended our programme of work in the accommodation sector with the launch of a project considering consumer rights for those in rented homes and a separate market study into housebuilding. Today we are publishing updates on those 2 pieces of work.

You can read the full update reports we are publishing today for the private rented sector: Rented housing sector consumer research project and housebuilding: Housebuilding market study on our website.

Private rented sector

In the private rented sector (PRS), we have carried out a process of extensive stakeholder engagement to understand the consumer protection issues that may be facing people when they rent a property.

Today’s update summarises the feedback we received from a wide variety of stakeholders in the PRS from across the UK. We heard numerous concerns about the sector, as well as some positive developments. It is a complex regulatory area spanning several different areas of government policy such as energy, tax and housing standards. Housing policy is largely devolved, with differing legislative frameworks, differing regulatory requirements for those trading in the sector, and different legal systems with different litigation processes for the resolution of disputes. Local authority enforcement differs across the 4 nations.

The breadth of our stakeholder engagement, and the range of needs the PRS has to meet, mean we have been told about a very wide variety of issues. Given that range, and the evolving legislative environment, our focus, since we concluded our engagement, has been to consider whether the issues we have heard about are within the scope of our consumer protection powers and whether, if the CMA is well placed to take action, we should investigate further. We are also mindful of the many recent reforms to assist tenants across the UK’s nations and of the important proposals for reform currently before Parliament in the Renters (Reform) Bill.

A consistent theme from stakeholders is that there is a lack of information available to consumers and landlords about their rights and obligations. Tenants need to engage early in the letting process with the steps necessary to protect themselves, for example by collecting their own thorough evidence of the condition of the property, and understand how to communicate with their landlord when they think things are going wrong. There is consensus that tenants find it hard to exert their rights against landlords, despite the existing statutory and contractual protections that are in place. This is a significant shortcoming given the importance of the services supplied to over 5m households.

We have been told repeatedly that avoiding the escalation of disputes is a very important element of maintaining a good relationship between landlord and tenant. We think revised guidance for lettings agents should help to raise consumer and landlord awareness of their respective rights and responsibilities because within the PRS the following practices, when undertaken by a landlord or letting agent acting as a trader, may amount to a breach of consumer protection law. For example:

• terms in tenancy agreements may be unfair if they purport to make the tenant liable for repairs that it is the landlord’s legal responsibility to carry out;
• it may be a misleading action to provide tenants with inaccurate information about their legal rights in relation to the tenancy;
• it may be a misleading omission to fail to mention that they receive a commission payment or other benefit for passing work to a third party;
• it may be an aggressive practice to use harassment, coercion or undue influence to convince a tenant to agree to certain contract terms, products or services; and
• it may be a breach of professional diligence to fail to comply with recognised standards, such as those set out in guidance or codes of practice, for landlords or letting agents

To assist landlords, tenants and letting agents and other intermediaries to understand their rights and obligations we will revise and update the CMA’s Letting Agents Guidance to reflect recent legislative changes, to clarify the rights and duties of landlords and tenants under consumer protection law and to highlight recent developments and issues in the market. To ensure that the revised Guidance is as helpful as possible to businesses and consumers we will investigate 5 important issues raised with us by stakeholders with a view not just to amending Guidance but, if necessary, also taking enforcement action.

The 5 issues we will investigate further are summarised below.

First, we will examine zero-deposit schemes, which normally require tenants to pay a non-refundable monthly fee and/or upfront premium instead of a larger upfront deposit payment. These types of schemes can be helpful to households which do not have access to a large deposit and may ease the issues arising around refunds of deposits when tenants move house. However, it is important that tenants understand the costs for which they may be liable under such schemes, and that the terms of such schemes are fair.

Second, we will carry out further work regarding what are known as “sham licences”. This is typically where a landlord purports to give a ‘licence to occupy’ a room within a property when in fact the terms of the contract create a tenancy. The terms of the agreement then attempt to exclude tenants from the rights they ought to enjoy when they enter into what is in fact an assured tenancy. This practice may affect the vulnerable, recent arrivals in the UK such as overseas students, and those who don’t understand English well. We understand that sham licence practices may exist across the UK however we have seen little data to indicate their prevalence and we will look into this further.

Third, we have seen examples of onerous guarantee clauses which impose very wide obligations on tenants – such as requiring then to provide extensive evidence of assets. Fourth, we heard about activity that could constitute unlawful discrimination: this includes, for example, advertising properties as not available to housing benefit claimants (‘no-DSS’).

We will look into these issues in more detail before deciding the best course of action.

Finally, we have also been made aware of issues surrounding retirement homes (these are properties built and aimed at older buyers to create retirement communities) and their impact on the rights and financial well-being of residents and their dependants. There may be problems around event fees which are charges imposed on residents when they leave or sell their retirement homes, which can be high and unpredictable, potentially limiting residents’ choices and financial outcomes. We want to review current practice in the market before deciding whether to take further action. We will provide a further update on this work before the end of 2023.

Housebuilding

Since launching our housebuilding market study on 28 February 2023, we have been gathering information and discussing issues with a range of stakeholders across England, Scotland and Wales. We are today publishing an update on our findings.

We have received responses to our Statement of Scope from almost 40 different organisations, as well as over 250 individual responses, largely from owners of new build properties. Alongside that, we have sent requests for information to the 11 largest housebuilders, a sample of small and medium size housebuilders, 40 land agents and promoters and 15 estate management companies, as well as carrying out interviews with local authorities, to build a picture of the market and assess how well it is working.

We have begun considering the outcomes that the market currently delivers for consumers, including supply, choice and quality of new build homes, as well as the extent to which innovation is being harnessed in the market. In the second part of the study we will continue to analyse the evidence we have received from housebuilders and other market participants, as well as the results of independent qualitative research that we have commissioned, to form a view on these issues.

Turning to the potential drivers of market outcomes, we have identified 5 key areas for further analysis.

First, we have heard concerns about the increasing use of private estate management companies to take on responsibility for public amenities such as roads, lighting and public open spaces in newly built estates. Over 250 members of the public have contacted us in relation to charges, service quality, restrictions on the use of their property and other concerns, including around transparency of estate management arrangements and charges, and lack of protection for residents in relation to such arrangements. Our analysis shows that over 80% of the freehold properties built by the largest 11 housebuilders in recent years are subject to such arrangements. Over the next few months we will be carrying out consumer research with a sample of new build owner-occupiers to understand more fully how these issues are affecting consumers.

Second, we have seen that land banks – the inventory of land held by housebuilders for potential future development – have expanded over the last decade, with the largest housebuilders owning or controlling significant swathes of land, accounting for hundreds of thousands of plots and equivalent to many years’ worth of future supply. While we have heard that ownership of a portfolio of land is essential to help ensure a steady stream of projects successfully passing through the planning system, we have also heard concerns that the extent of land banks held by large firms could have the effect of giving them market power in some areas, reducing the ability of SME builders to compete and allowing them to build out more slowly to achieve higher sales prices than would otherwise be the case. We will investigate this further in the second half of the study.

Third, we have heard that various aspects of the planning system are significantly impeding the effective functioning of the housing market. Complexity and uncertainty in the overall system has been highlighted as a factor, as well as the length of time taken to grant planning permission, which appears to have been increasing over time. Our analysis of the planning application data in England, for example, shows that the percentage of the major dwelling planning decisions that were made within the statutory 13-week deadline fell significantly from above 50% in 2009 to below 20% in 2021. We would expect difficulties in navigating the planning system to have a greater impact on SME housebuilders, as increasing fixed costs of managing the planning process will represent a higher proportion of the revenue of a smaller firm. We are also considering the impact of planning policy on the incentives of local planning authorities in England, Scotland and Wales to deliver new housing. We will continue to consider these issues in the second half of our study.

Fourth, we are looking at potential barriers to entry and expansion in the market. Such barriers are likely to disproportionately affect SMEs housebuilders, and the key barriers for them appear to be related to negotiating the planning system and access to land. We are also considering the significance of other potential barriers, such as access to finance.

Finally, we are examining how competition works in the market, both in terms of competition to secure land for development and competition to supply housing to consumers, as well as the interplay between the 2. While the housebuilding market does not appear to be particularly concentrated at a national level, we will continue to investigate whether concentration in particular local areas may lead to poor outcomes, such as slower delivery of housing. We will also consider the factors behind the reduction in the share of the market accounted for by SME builders, and the impact of this decline on market outcomes.

We have started to think about possible remedies that could address any concerns about the operation of the market that we have at the end of the study.

The legal framework that applies to market studies requires us to decide, within 6 months of launch, whether or not to consult on the possibility of a formal Market Investigation Reference (MIR). An MIR is only one possible outcome of a market study. It would involve the CMA undertaking a second stage in-depth investigation into at areas of competition concern over a longer period and gives the CMA certain legal powers to tackle competition concerns directly. Given the intrinsic importance of the legislative and regulatory framework to how the housing market operates, it may be the case that the potential issues we have identified to date would be best tackled instead through legislative reform or other recommendations to government at the end of the market study, rather than by further CMA investigation and the possibility of subsequent direct CMA action. This is something we will conclude on at the end of our market study. ^{[footnote 2]}

At this stage, we have identified 2 areas of concern where there may be a basis for an MIR. In line with our legal obligations, as recently interpreted in a judgment from the Competition Appeal Tribunal ^{[footnote 3]}, we are today launching a consultation to seek market participants’ input with regard to possibility of an MIR in relation to the private management of public amenities on new-build estates and the land banks controlled by the largest housebuilders. In the second half of the study we will investigate further the extent to which these features of the market are having a negative effect on competition, with negative outcomes for consumers. Importantly, we will also consider whether an MIR is the most appropriate way to address those concerns or whether there are more effective alternatives such as recommendations to government for legislative change.

If we find that our concerns about how the market is operating are mainly the result of deficiencies in the legal framework (in this case, most likely the planning system and the framework for local authority adoption of public amenities/the lack of regulatory protection for freeholders on estates with amenities managed by private providers) then recommendations to government may well be the best way to secure the change needed to improve outcomes in the market for consumers, businesses and the wider economy. If on the other hand, we find that our concerns are primarily driven by the way firms are competing, then an MIR may be the most effective way to deal with those concerns. If there are issues with how competition is working in the market, we will also consider other potential action we can take, such as recommendations to business, giving guidance to consumers or, in the event that we find any evidence of action contrary to consumer or competition law, taking enforcement action.

The CMA does not have to make a final decision on whether to make an MIR or other potential action until the conclusion of the market study. In the second half of our study, we will consider carefully any submissions made to us in response to the consultation and further evidence before making our final decision on what action would most effectively improve outcomes for consumers and who would be best placed to take this forward.

We will publish working papers in the autumn setting out more detailed thinking and analysis on key areas of concern, including our emerging thinking on the most effective solutions to tackle those concerns.

The statutory deadline for our final market study report is 27 February 2024.

1. Office for National Statistics (ONS), released 14 July 2023, ONS website, article, Impact of increased cost of living on adults across Great Britain: February to May 2023 ↩

2. Market studies may lead to a range of outcomes, including: a clean bill of health; actions which improve the quality and accessibility of information to consumers; encouraging businesses in the market to self-regulate; making recommendations to government to change regulations or public policy; taking competition or consumer enforcement action; and making a market investigation, or accepting undertakings in lieu of doing so. ↩

3. The recent judgment of the Competition Appeal Tribunal (CAT) in Apple v CMA was an important factor in our decision to launch a consultation. In this judgment, the CAT made clear that, where the CMA decides at 6 months not to make a MIR, it cannot (subject to some very narrow exceptions) revisit that decision should subsequent evidence or developments come to light in the second half of the market study. The CMA is currently appealing this judgment. ↩