In recent years, every incoming administration in the UK has pledged to increase the construction of new homes. Newly appointed ministers often visit recently finished housing projects, showcasing their commitment to addressing housing needs while smiling as they hand keys to excited first-time homeowners. Their speeches typically focus on aspirations for home ownership.
However, a critical, often unaddressed reality is that the minister does not control the number of new homes constructed during their tenure. Instead, the primary decisions regarding housing development rest in the hands of major property developers, who possess significant control over land and resources, thereby shaping the market landscape.
The UK’s situation is notably different compared to other countries. In Germany, for instance, it is common for individuals to purchase land and hire local builders to construct their homes, with this method accounting for over 50% of housing development. In contrast, the UK’s figure stands at just 7%. In France, a larger portion of housing is developed by municipal authorities and social housing providers, while Sweden sees a greater influence from cooperatives.
In the UK, the bulk of new housing is produced by large volume housebuilders, who favor a speculative development model. This trend has evolved over decades, especially after public housing initiatives declined post-1980s. The number of smaller construction firms diminished significantly, from around 10,000 in the 1980s to just 2,800 by the mid-2010s, and it has continued to fall. As a result, if ministers wish to see an increase in housing construction, they must appeal to these major developers, often pleading for them to increase their output.
Unfortunately, the response from these developers is frequently negative. Their speculative approach involves controlling the market release of homes to optimize profits. During economic downturns, it becomes prudent for them to scale back production. Even in prosperous times, such as between 2012 and 2015, when profits for the largest builders surged by nearly 200%, their home output only increased by 33%.
This backdrop sets the stage for the current news involving the UK’s largest seven housebuilders, who are facing a collective lawsuit representing approximately 700,000 individuals who purchased new homes between October 2015 and June of this year. The case is initiated by a single representative acting on behalf of this group, many of whom may be unaware of the proceedings. The lawsuit seeks compensation ranging from £3,100 to £6,200 for each claimant, potentially costing the industry between £2.2 billion and £4.5 billion.
The path to this situation has been lengthy. In 2022, then-Housing Secretary Michael Gove aimed to instigate change and requested a comprehensive market study from the Competition and Markets Authority (CMA) regarding volume housebuilders. The study, released in early 2024, concluded that the UK’s inadequate home construction is structurally rooted in the speculative nature of these builders conflicting with an uncertain planning framework.
Interestingly, a minor finding in the report indicated that internal documents from housebuilders suggested potential sharing of sensitive commercial information, which could have impacted pricing strategies, a violation of the law. Consequently, the CMA launched a further investigation in February 2024.
This investigation concluded unexpectedly in October of the previous year, with the CMA deciding to terminate the inquiry without a definitive resolution. In return, the builders involved consented to contribute a total of £100 million to government-affiliated affordable housing initiatives, commit to preventing future sharing of sensitive information, and develop new guidelines on information exchange. The builders were neither cleared of wrongdoing nor found guilty of competition law violations; the inquiry simply ceased. Nevertheless, law firms specializing in class actions recognized the potential for a lawsuit, and the Competition Appeal Tribunal is set to decide whether the case can proceed.
The alleged infractions by the housebuilders appear relatively minor when viewed in a broader context. The CMA expressed concerns primarily about the sharing of non-public information, such as agreed-upon prices and incentives offered to buyers, which could provide insights into market dynamics and pricing strategies for other builders in the vicinity.
Industry analyst Neal Hudson posits that the concerns likely stem from informal exchanges among sales personnel across various sites rather than systematic corporate-level data sharing.
Nonetheless, if these practices did influence market prices, competition laws would entitle the buyers to seek compensation. The seven housebuilders facing this claim have remained largely silent, with the exception of the Berkeley Group, which acknowledged awareness of the allegations but deemed it inappropriate to comment further.
Given the existing scandals surrounding new-build homes—including issues related to poor construction quality, undisclosed management fees, leasehold controversies, and executive remuneration—this lawsuit highlights a critical moment in the industry, reminiscent of the adage regarding Al Capone being pursued for tax evasion.
However, should this case proceed, it would pose significant challenges for builders, especially in the current economic climate marked by inflation and geopolitical tensions affecting construction costs.
