Time for a major regulatory review of housing markets
Phil Evans is an independent consultant and prospective class representative in the FX follow-on class action. He was formerly an inquiry Chair at the CMA and long-standing consumer advocate.
Time to read
The regulation of the housing market resembles the famous gag about the traveller who asks for directions from A to B and is met with the reply; ‘well I wouldn’t start from here’. However, here is where we are. If we are to make sensible progress in the regulation of a sector of such central importance to the lives and economy of the UK, then we have to start from the hand we are dealt with. The key problem appears to be that no one wants seriously to look at the hand we have been dealt.
While the Grenfell Disaster has thrown into stark relief many of the structural failings of the housing market, it has not managed to trigger meaningful action from any of the key actors. As a long-time consumer and competition activist I shall attempt to assess this from the standpoint of those two regimes.
Competition regulation is carried out primarily by the Competition and Markets Authority, although in important areas, such as financial services, it carries out that regulation in conjunction with the relevant sectoral regulator, in this case the Financial Conduct Authority. Both the CMA and FCA have a number of priorities set for them by Parliament; of most relevance here, both share a focus on promoting competition policy and advancing the consumer interest.
In any competition analysis the relevant bodies will look for: evidence of consumer detriment; power imbalances; principal-agent problems (i.e., how to get the party with the responsibility to act to actually act); and the functioning of a market pre- and post-inquiry that will help embed any reforms that are proposed.
One of the central problems of the housing market for consumers is the array of markets and sub-markets that appear to exist in the housing sector. Particularly problematic is the range of operators in those markets and the number of government and non-governmental bodies that are responsible for oversight and regulation of different aspects of the overall market.
For a market of the size and significance of the UK’s housing market, the CMA’s involvement has been relatively limited. Until recently, involvement focused primarily on reviewing housing mergers, busting cartels in construction, and limited aspects of consumer protection in the private rental market.
Two recent cases illustrate both the pitfalls of CMA engagement and the potential for future action.
1) 2017 Review
First, in 2017 the CMA undertook a review of undertakings given by the National House Builders Council (NHBC) in 1995 in the area of structural warranties as part of an economy-wide review of remedies imposed under previous legal regimes.
In general, many remedies were either no longer relevant, overly restrictive, or otherwise had not kept up with developments in the sector. In the case of the NHBC, the 1995 undertakings were designed to encourage house builders to shop around for structural warranties. An earlier inquiry that led to these 1995 undertakings was launched in May 1990. At this time, the NHBC had 90% of the structural warranties market. Remedies were imposed to try to inject more competition into the marketplace and when the remedies were reviewed in 2017, the NHBC admitted to having 80% of the structural warranties marketplace.
It is important to note that the object of the undertakings review was simply to decide whether the problem the remedies were designed to deal with was still worthy of remediation through undertakings. It was not a wholesale review of the market.
The undertakings review generated remarkably little in the way of responses perhaps because of this limited purview. In fact, there were only three or four responses, two of which spoke to factors outside the scope of the review.
Given the incredibly limited response it is worth noting that the CMA chose to maintain the remedies in an amended form but excise itself from the need to monitor them too closely.
2) Leasehold agreements
The second area of CMA action focuses on the potential unfairness of specific clauses in leasehold agreements. For instance, the CMA found that particular examples of contractual terms allowing the doubling of ground rents were unfair and needed removal. The CMA continues to investigate permission charges and other service charges.
Somewhat surprisingly, the problems that the CMA have recently looked at are essentially established issues or longstanding consumer welfare losses. Regarding the 2017 Review, the CMA maintained remedies on a market where competition had only managed to chip away a dominant position from 90% to 80% in the space of 27 years. When reviewing leasehold agreements, the CMA took limited action to try and halt a longstanding source of consumer harm that has led to many terrible examples of consumers being trapped into charges that become exorbitant.
Stepping back from these individual cases and placing them within the post-Grenfell landscape, it is not difficult to make a case for further action. It is difficult to imagine any other sector of the economy where a potentially fatal post-purchase safety fault can be uncovered only for the purchaser to be left with the cost of fixing that problem. It is difficult, from a purely ethical point of view, to consider any contract a ‘fair’ one that requires the purchaser of a product to pay for remediation works or to pay for ‘waking patrols’ to warn of potential fires.
The lack of effective competition and indeed interest in the NHBC structural warranties review and positive support for leasehold reforms can inform where the CMA needs to look next. It is certainly the case that there are many bodies looking at the housing market. However, very few are doing so from a consumer perspective. Most reviews appear to be designed to tinker at the edges of issues, rarely taking an overview of the functioning of the marketplace. While the Grenfell Inquiry will try to disentangle the web of responsibilities to ascertain how to avoid such disasters in the future, it is not a review of the structure and functioning of a market where consumers often appear to have little power and few levers to influence those that do.
There is only one body that can realistically undertake a market study of the new build and refurbished housing markets. The enormous bills and service charges that consumers are paying as a result of dangerous cladding do not appear to be being fairly applied. The dysfunctional pattern of behaviour evidenced in the structural warranties market (poor responses, reliance on small print etc), requires a full review, as do the terms obliging consumers to foot the bill for basic safety measures for products they had a reasonable expectation of being safe.
Around 2015-2017, certain Vauxhall Zafiras were discovered to have a risk of bursting into flames. Over 200,000 vehicles were recalled. There was a specific body able to coordinate action, the Driver Vehicle Standards Agency, and public pressure to force further action. Even though, as in most recall cases, Vauxhall argued that unauthorised repairs were to blame for some of the problems, it still fixed the relevant vehicles. There is no logical reason why the new build and refurbished housing market should be any different to the car market in this regard.
The CMA is ideally placed to identify the steps that need to be taken to help to create a market that resembles more closely a consumer-responsive market, rather than one that traps consumers in unfair contractual situations. The CMA and FCA should launch a review of the building blocks of the relevant markets and start to develop a consumer-centric view of how that market should work. The review should start with the structural warranties market and extend the leasehold work to contractual terms that allow consumers to be charged for waking patrols and cladding removal.
How to cite this blogpost (Harvard style)
Evans, P. (2021). Time for a major regulatory review of housing markets. Available at: https://www.law.ox.ac.uk/housing-after-grenfell/blog/2021/06/time-major-regulatory-review-housing-markets (Accessed [date])
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