CMA publish Final Report into Housebuilders – Finds Build Out Rate designed to Ensure Prices Do Not Fall

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In terms of how quickly housing is built and the price at which it is sold, instead of building houses as quickly as possible, a range of evidence shows housebuilders tend to build them at a rate that is consistent with the local absorption rates, ie, the rate at which houses can be sold without needing to reduce their prices.

(a) The extent to which housebuilders can expand their supply in a local area is inherently limited by the extent to which they can get hold of further land with planning permission in the area. As a result, the effect of lowering their prices is more likely to bring sales forward in time, rather than increase their overall sales over the medium term; therefore, doing this will rarely be a profitmaximising strategy for housebuilders. Given that it is costly for housebuilders to have capital tied up in partly finished or finished, unsold homes, they are incentivised to control their build-out rate to a level that maintains selling prices.

(b) Builders’ incentives to pursue the strategy of maximising sales prices are reinforced by the way they compete to purchase developable land. Most land is bought under the residual valuation model, meaning that when housebuilders bid for land, they offer a price that is affordable based on their estimate of the value of the homes they can build on it. Given the competition we observe for land, housebuilders must offer the highest possible price to secure it. With all housebuilders subject to the same market forces, this further incentivises housebuilders to build out at a rate that supports high prices, rather than (outside of a housing market downturn) reducing prices to increase the volume they can sell.

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