Findings from the CMA’s market study of the housebuilding sector

The Competition & Markets Authority (CMA) has published the most forensic analysis of the housebuilding sector's interaction with the planning system since the Barker Review of 2004. The final report is available here and is essential reading for any planning and property professionals because it serves two very important purposes.

Firstly, it lays bare many of the challenges that planning and property professionals have to grapple with on a daily basis and in a clear-eyed way deals with some of the misunderstandings about the homebuilding sector.

Planning

• In order to deliver a given number of homes, the number of planning permissions granted must be sustained at a somewhat higher level, over an extended period, as a proportion of permissions will lapse or be re-applications relating to a previously permissioned project (4.13). The number of new permissions has at no point been significantly above 300,000, indicating that insufficient new permissions are being granted to support the provision of 300,000 new homes per year (4.15).
• Only 12% of major planning applications are determined on time (4.28) and the cost of submitting one is typically £100-£900k (4.30).
• 44% of England is potentially suitable for development and less than 10% of the potentially suitable land is brownfield (4.47).
• In order for land to be brought to market for development, landowners need to be willing to sell it (4.50).
• Strategic land takes, on average, seven years to come forward (4.88).
• For SMEs planning and land are much greater barriers than access to finance (4.183).
• The sum of LPA targets only adds up to 225,000 (5.155). Housing targets should only be adjusted when new household projections are published to assist stability in local plan targets and should only be adjusted in relation to housing need factors (5.158).

Land market / Landbanking

• Attempting to artificially reduce the size of land banks from their current level, without tackling the elements of the market that are driving housebuilders to hold them, would be likely to drive lower completion rates (4.103).
• The CMA’s conclusions are more robust than, for example, the 2008 OFT Investigation or the Letwin Review because of the material solicited from homebuilders (4.84).
• Competitive bidding processes were used for the sale of 82% of sites. Limited tenders reduced the number of invited bidders, but this does not result in there being substantially fewer bids submitted compared with open market tenders. On average there were 5.7 bidders for limited tenders, and 6.2 bidders for open market tenders (4.58).
• Smaller sites are more likely to be sold off-market than larger sites (4.58).
• Only 65% of sites sold by land promoters complete within twelve months of securing planning permission. This was 49% in 2020 (4.67).
• Build-out is one of the key levers available to homebuilders to mitigate macroeconomic risk and restricting the ability to flex build rate may increase risk exposure and compromise viability (5.236). Unless more planning permissions are granted over the longer run, improvements to build-out rates are likely to change when homes are built, rather than to have a large impact on how many homes are built (4.120).
• The second-hand market is a constraint on new build prices and, for the most part, homebuilders’ share of local supply is unlikely to be sufficient to be able to boost the overall market price of housing by restricting their output (4.137). Bid price sale estimates, informed by the second-hand market, must be adhered to maintain profitability (4.111 and 4.113).
• In no part of the country is concentration arising because of deliberate strategies to limit competition. In some cases, concentration arises due to a limit on amount of land suitable for development or number of permissions being granted in that area, which acts as an external constraint on how many builders can be active (4.100).

Other

• Several evaluations of Help to Buy have generally found that the scheme led to some additional housebuilding, particularly in areas that were less supply-constrained. However, evaluations have also found that the scheme most likely provided support to some homebuyers who would have bought anyway, and in supply-constrained areas such as London, it inflated prices without having a significant effect on housing supply (4.127).
• The availability and condition of housing can influence socially important factors such as health outcomes, educational attainment, and productivity (4.207).
• The proliferation of private estate management companies managing public amenities is the result of a decrease in levels of adoption by the relevant authorities (4.161).

Secondly, and in going somewhat beyond the initial scope of the study, the report sets out a series of very sensible policy recommendations, many of which planning and property professionals have been promoting for some time, and can do so henceforth "with the endorsement of the CMA".

The majority of them are relatively straightforward levers to pull relative to the positive impact that they would have on land availability and the transaction of planning applications. 

Incentivise plan-making

• Ringfencing funds (fees, grants, New Homes Bonus) that LPAs can use only if they have an up-to-date local plan in place (5.163).

A stronger presumption

• Making it more difficult for LPAs to reject planning applications if they do not have an up-to-date plan in place (5.164).

Decision-making

• Simplifying the outline permission stage of planning applications (5.208).

• Governments taking over the decision-making authority in a local area until a local plan is in place and, as a last resort, imposing a local plan on the LPA (5.164).

• Creating a fast-tracked route for in-principle approval for applications that are in line with an adopted local plan (5.175).

• Formally reviewing the varied LPA schemes of delegation with a view to harmonising the complex set of rules and removing the use of Planning Committees for those applications which are broadly in-line with the local plan and/or which below an agreed threshold (5.175).

Appeals

• Improving the appeals process (as informal hearing and written representations appeals can cause delays and have an adverse impact on the delivery of smaller housing schemes and on SME housebuilders) (5.175).

Statutory Consultees

• Reduce the delay caused by the statutory consultation process by clearly defining which organisations must be consulted before planning applications can proceed (5.183) and encourage responses from statutory consultees to be received in a timely manner, potentially disregarded late ones (5.185).

LPA Resources

• Setting planning fees at a level which covers the costs incurred by LPAs in administering the planning system in their local area (and ringfencing these fees to support the planning process) (5.191).

Small Sites

• It is noted that the NPPF states that LPAs should identify land for at least 10% of their housing requirement on sites no larger than one hectare. This could be strengthened to require explicit identification of the sites that will comprise this 10%, alongside regular enforcement of the policy (5.216).

The bigger and more contentious recommendation relates to the thorny issues of targets. 

• To increase certainty in the planning system, there should be limited discretion for governments to adjust housing targets, and they should be binding and enforceable on LPAs (the CMA note that recent steps announced by the UK government to allow LPAs to justify not meeting housing targets in England runs contrary to the direction of travel considered most appropriate) (5.153).

How to calculate how many homes to build and how to distribute them is arguably the largest, heaviest planning-related lever that any Government is faced with pulling and is, fundamentally, a political choice. What the CMA have done though, is to helpfully set out the tests against which any new and improved version of the Standard Method should be assessed.

Reforms to the Standard Method (5.158)

Reflecting upon the issues with the current approach to setting targets, a more effective methodology, that would be more likely to result in a target that accurately reflects need would have the following features:

• Ease of understanding – ensuring that the assessment of housing need is easily implementable and has results that are readily understood will allow for the target to be more readily accepted and its outputs to be more easily disseminated.
• Using reliable evidence – using up-to-date and robust evidence will ensure that the target will more closely reflect current housing need. In addition, using evidence from credible and, where possible, publicly available sources will help ensure that the results are more easily understood and accepted.
• Regular assessment – regular calculation of the housing target will help to ensure that the target is as accurate as possible. There is a balance to be struck here, however, as LPAs need a degree of stability in the national target so that they can effectively plan to deliver their local housing target for the medium and long term. Updating the target too frequently could lead to increased uncertainty at a local level, as well as the national and local target losing credibility. To achieve the right balance, the target could, for example, be updated whenever updated national household projections are available, but no more frequently than this.
• Unadjusted outputs – housing policy is a matter for governments and incorporating aspects of policy targets, such as brownfield land use, may be an appropriate way of achieving policy aims. However, reducing the incorporation of other policy aims in the methodology through adjustments will result in the target being more reflective of underlying housing need. Therefore, such adjustments should be kept to a minimum with limited scope for discretion for the governments in making such adjustments.
• Local alignment with national target – limiting the extent to which LPAs are able to deviate from the agreed methodology will result in local targets that are more closely aligned with the national target. 

Regardless of how many homes the next Government plans for the current iteration of the standard method is not fit for purpose and if it is to be repurposed the CMA have helpfully set out the tests against which a new method should be assessed.