Homebuilding in the UK market study - updates

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25 September 2008

The OFT's market study into the homebuilding sector says that while the sector is broadly competitive, many homebuyers experience faults or delays. As a result, the industry has agreed to develop its own code of conduct and redress scheme for consumers.

The OFT found little evidence of competition problems with the delivery of new homes in the UK. On the whole, barriers to entering the market appear low, and it is likely to be the case that homebuilders compete for sales against each other and existing homes. There is no evidence that individual homebuilders have persistent or widespread market power giving them the ability to restrict supply in order to inflate prices.

However, the OFT found that homebuyers can experience a number of problems, including:

• delays in moving in
• faults in new homes, and
• issues around the sales process such as reservation fees, the clarity of information provided to homebuyers and potentially unfair terms and conditions in contracts.

As a result, representatives from across the sector have agreed to form a body to deliver a code of conduct and redress scheme for consumers, which it aims to have fully operational by March 2010. However, if the industry fails to make adequate progress or deliver an effective solution, the OFT recommends further intervention through a statutory redress mechanism. This would involve a means of redress for homebuyers with the ability to award compensation for any failings in the sales process, shortcomings in contracts, delays or faults, and would need to be funded by a levy on the industry.

The study also found no evidence that homebuilders have the ability to anti-competitively hoard land or withhold a large amount of land with planning permission on which they have not started to build. Instead, it is likely to be the case that 'landbanking' reflects the need for firms to have a pipeline of land at different stages in the development process.

The report also stresses the importance of maintaining a vibrant small and self-build sector. This includes recommending that the Government and the Welsh Assembly should help small homebuilders and self builders meet the technological advances required by the Code for Sustainable Homes by enabling them to make use of 'off-the-peg' solutions. They should also consider assisting small homebuilders and self-builders to access the necessary technologies to overcome the zero carbon challenge.

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23 January 2009

In response to the publication of its market study report entitled 'Homebuilding in the UK' the homebuilding Industry said it would set up a voluntary code to address matters set out in the market study report.

The report detailed four milestones which the Industry should meet on the way to launching its Code. The first milestone was: ' December 2008: to create the body which will administer the code of conduct.'

We received signed Heads of Agreement on 30 December 2008. They were signed on behalf of three warranty providers: National House Building Council (NHBC), MD Insurance Services Limited and Zurich Insurance Company (UK) Limited.

The OFT considers that, technically, the Heads of Agreement do not constitute a body capable of administering the Code. However, they appear to start the process of establishing such a body.

In addition, the Industry has informed the OFT that an un-constituted 'shadow' board and advisory board with named members is now in operation. The Industry has said that these 'shadow' boards are acting as though they were part of a constituted body.

Further, the Industry has advised the OFT that a constituted body will be formed by 31 March 2009.

We acknowledge that the Industry has not met the 'letter' of the first milestone but we never intended either failure or success on the milestones to be judged in a technical or bureaucratic way. Given the circumstances outlined above, the Industry's continued assurances and stated progress towards other milestones, and the fact that it currently appears that the creation of an operational voluntary Code by March 2010 still remains a realistic prospect, the OFT is content to consider the first milestone achieved. Although, we trust that the subsequent milestones will be met in a more definitive way.

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22 May 2009

The OFT was officially informed in writing on the 16 February 2009 that Zurich Insurance Company (UK) Limited (Zurich) had withdrawn from the body which proposed to administer the homebuilding code, leaving National House Building Council and MD Insurance Services Limited to form the code body alone.

Zurich was an original signatory to the industry's proposal to form an industry code to deal with the issues raised in the market study report.

As agreed between the OFT and the industry, the proposal for the homebuilding code envisaged that the code would have provided the 'established means' for the control of unfair commercial practice under the Consumer Protection from Unfair Trading Regulations 2008 and the Business Protection from Misleading Marketing Regulations 2008 within the homebuilding industry. View information on established means (pdf 197kb).

In response to the withdrawal of Zurich from the code body, the OFT has expressed concern about allowing the remaining signatories to form a code which became the established means of enforcing aspects of consumer law in the homebuilding industry. This concern arose from the fact that the OFT would have to treat certain operators within the industry differently. In the OFT's view, this was not an appropriate use of the 'established means' status and could appear to accord certain operators within the industry preferential treatment from the OFT.

Following further consideration of the situation, the OFT believes that, without Zurich's participation, the form of code as originally envisaged in the market study is no longer achievable. The OFT has informed the industry of its view.  

It is the case, however, that the industry has made significant progress towards developing a voluntary code. The industry has informed the OFT that it remains committed to introducing a form of voluntary code in the near future.

The industry is currently considering whether to make an application for its code under the OFT's Consumer Codes Approval Scheme (CCAS) or whether its code will operate without OFT approval. The OFT has informed the industry that some aspects of its proposed code may not meet the OFT's CCAS criteria, for instance, the OFT considers that the currently proposed limit on the redress scheme is too low.

The OFT understands that the industry's aim in developing its code is to meet the OFT's concerns as set out in its market study report, entitled Homebuilding in the UK (pdf 768kb). However, the OFT firmly believes that it is also essential for the code to be evaluated against a recognised benchmark to ensure its effectiveness. If the industry decides not to apply for approval of it code under the CCAS criteria, the OFT is concerned that there would then be no recognised benchmark by which to measure the effectiveness of the industry's code going forward.

We understand the industry will make a decision whether or not to apply for OFT approval by the end of June 2009 - between now and the end of June it will assess whether or not it can make the changes to meet the requirements of CCAS. The OFT will publish a further update on this page at around that time.

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July 2009

The OFT has given high level advice to the code body about the improvements they would have to make to their proposed code in order to meet the CCAS standards (see Approved Codes of Practice (pdf 65kb)) and satisfy the concerns in the homebuilding market study. These include but are not limited to advice regarding the concerns around delays in moving in, the legal status of reservation agreements and contract terms, the rectification of snags and the access to and level of redress. The industry code body has now informed us that it is unlikely to decide whether to apply for its code to be approved under CCAS before September.

The OFT continues to be supportive of industry efforts to implement a code and will continue to work with the code body and stands ready to advise on request.

The market study set out a timetable of milestones and deadlines with the purpose of ensuring progress, against the background of previous reports and recommendations about the implementation of a code in this sector.

While we acknowledge the considerable progress made by the code body, it can no long be said that it is working to any timetable agreed with the OFT as a result of the market study - indeed since CCAS approval is an entirely voluntary scheme, this could be argued to be quite appropriate.

In these circumstances, the OFT considers that its 'backstop' recommendation to the Government of a statutory redress scheme must now be made but the OFT acknowledges that the Government will wish to take into account the ongoing progress in deciding whether, or when, to act on the OFT's recommendation.

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