20 February 2023

Could the housing market be about to get even worse?

By Mikhail Korneev

Dangerous cladding led to the deaths of 72 people in Grenfell Tower and has left thousands more trapped living in unsafe buildings. The Government is rightly holding private companies to account, and making those who put flammable material on houses pay to remove it. But, as ever with new regulation, ministers should beware of unintended consequences.

Over recent decades the UK housing market has been getting ever closer to an oligopoly, and the planning system has largely contributed to this process. But while large builders can absorb extra costs, small and medium enterprises (SMEs) which operate on tight margins are less able to do so. New regulations risk consolidating the market even further by creating barriers to entry for SMEs. 

This process is already underway. In 1988, small and medium builders (those who complete under 500 units a year) built 39% of new houses, a figure which had dropped to just 12% by 2017. To a significant extent, the decline can be attributed to the 2008 financial crisis. Unlike large firms, many SMEs did not have the capacity to survive the economic shock and ceased to exist.

Even though construction volumes were growing overall in the years after the 2007-2008 crisis, the SME sector has never fully recovered. A recent 2022 survey by the Federation of Master Builders revealed that the proportion of houses provided by SMEs had decreased further and now accounts for just 10%. 

What undermined the recovery are barriers to entry inherent to the UK housing market and in particular to the planning system. As observed by the House of Lords Built Environment Committee, local authorities have a clear preference for large strategic developments. This pushes SMEs, which usually operate on small sites, out of the market. 

A more fundamental factor, however, is uncertainty. Getting planning permission has come to be associated with ever-increasing risks and costs. The process may take between three months to four years. Large builders can distribute risks and use internal capital to maintain profits. By contrast, for SMEs, a year of delay often means a year of net losses. In other words, the imperfections in the planning system affect SMEs disproportionately.  

As a result, one third of the market is controlled by the four largest developers, according to recent estimates. The decline in competition means higher prices for consumers and allows big stakeholders to exercise control over the volume of the housing supply. 

In fairness, the Government has made several attempts to simplify the planning process and accelerate decision-making. Still, neither the 2012 National Planning Policy Framework’s recommendations with regard to SMEs, nor the suggestions in the 2017 ‘Fixing our Broken Housing Market’ white paper have materialised. Some improvements to the speed of the planning process may, however, come with the implementation of the Levelling-up and Regeneration Bill, which is currently pending in the House of Lords.  

What has been implemented so far are primarily financial support measures aimed to provide targeted assistance to SMEs, such as the Levelling Up Home Building Fund. While access to finance is indeed a major barrier to entry for SMEs, these efforts do not address the root of the problem – the uncertainty produced by the planning system.

It is concerning that factors that stopped smaller firms recovering after the 2008 crisis still prevail. The planning system maintains the environment in which larger firms have clear advantages over SMEs.

Additional financing can keep SMEs afloat. However, a more comprehensive and sustainable solution would be to focus on the planning system itself. Reducing the complexity of the planning procedure would have long-term positive effects, improving competition, which could in turn reduce prices and boost the housing supply. But with the planning system in its current form and yet more red tape being introduced, further consolidation seems a more likely outcome.

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Mikhail Korneev is Research Assistant at Bright Blue.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.