Britain’s housebuilding oligopoly will not resolve the housing crisis

“Though it is hardly a secret that we inhabit a world dominated by business oligopolies, during the crisis and its aftermath this reality and its implications for the priorities of government stood nakedly exposed. It is an unpalatable and explosive truth that democratic politics on both sides of the Atlantic has choked on it.” – Adam Tooze, Crashed

“Business is a force for good in society.” – Keir Starmer

“The UK’s big developers have become far too powerful. In terms of the quality of homes built and consumer misery, these companies produce outcomes that are really quite nasty — this is not how capitalism is supposed to work.” – Michael Forsyth, chair of the Lords’ Economic Affairs Select Committee

There is a thread running through the politics and economics of the Labour leadership which neglects the reality of “a world dominated by business oligopolies.” These are a small number of companies that dominate a market. Investopedia says: “An oligopoly is a market structure wherein a small number of producers work to restrict output and/or fix prices so they can achieve above-normal market returns.”

The word comes from the Greek combining ‘few’ and ‘sellers’. The building industry is one such oligopoly. According to Archer and Cole’s research, “The top ten housebuilders have increased their share of housing production from 9 per cent in 1960 to 47 per cent by 2015. In 1980 there were over 10,000 small and medium housebuilders, building 57 per cent of all housing. In 2014 this had dropped to 2,800 firms delivering just 27 per cent of all output.”

A report from the House of Lords Built Environment Committee in January 2022, Meeting housing demand, notes that small and medium sized enterprises developed 10 per cent of new homes in 2020, down from 39 per cent in 1988.

Even Boris Johnson bemoaned the existence of oligopolies. In a market dominated by an oligopoly the supposed law of supply and demand does not apply. The big builders don’t compete with each other on price. They build at a pace and scale which maximises their profits. They are not interested in resolving the housing crisis.

The Communities and Local Government Parliamentary Committee explained that:

“The high volume homebuilders dominate the market and are therefore able to shape how it operates. Having purchased land at a given price and devised a scheme that will allow them to recoup their investment and deliver a profit, they will not risk over-saturating a local market to the extent that house prices will fall and their profits decrease.” – The Structure of the Home building Industry 2017

While saying that this is “rational” commercial behaviour they do admit that “it’s not in the best interests of the country”.

Help to Buy which focused on new build, has practically been a subsidy for the big builders whose profits have risen exponentially. Archer & Cole record that:

“From 2012-15, the output of the nine largest private housebuilders grew by 33 per cent. Revenues increased by 76 per cent. In the same time frame, profit before tax (prior to the removal of exceptional items and financing costs) rose by nearly 200 per cent for these nine firms. Over a slightly longer period, 2010-15, the profits before tax of the top five housebuilders increased by 473 per cent. End of year profits for the biggest five firms (after taxation, impairments and exceptional items are taken into account) increased from £372 million in 2010 to over £2 billion by 2015 – an increase of over 480 per cent.”

This means big bucks for the shareholders. In 2015, the biggest five housebuilders returned 43 per cent of their annual profits to shareholders, an amount totalling £936m. “This raises questions about the potential volume of new supply that could have been provided through reinvestment of at least some of this money,” say Archer and Cole.

A later study by them in 2021 finds that before the financial crash each completed home netted an average pre-tax profit of slightly more than £30,000 across the nine largest UK housebuilders. By 2017 that had doubled to more than £62,000. The dividends paid out went from an aggregate £400mn to more than £1.8bn during the same period.

Savills reported in November 2022 that the top nine builders had increased their profits to £2.8 billion.

Housebuilding with “rocket boosters”?

When Rachel Reeves talks about putting “rocket boosters” on housebuilding this is likely to mean more of these super-profits for this oligopoly. Setting Labour’s main target at 70 per cent home ownership and promising some form of state support for those who can afford a mortgage but can’t raise a deposit, will certainly put rocket boosters on the profits of these companies and the dividends they pay. But it won’t resolve the housing crisis. It’s likely to drive up house prices just as Help to Buy did.

Test Keir Starmer’s assertion that “business is a force for good in society” against the reality of this “business oligopoly” in the building industry and it is shown to be a delusion. Not only does Britain have the smallest homes in Europe, but the quality of many new builds is poor. Stories of new home owners struggling to get large numbers of ‘snags’ sorted out by the builders are legion – see here for example. The cladding scandal was the responsibility of the big builders as well as politicians in their deregulation frenzy.

Grenfell Tower was the result of deregulation by governments, including New Labour. In his forensic account of Grenfell, Show me the bodies, on how it was allowed to happen by the combined efforts of the politicians and the building companies, Peter Apps wrote”

“Over a period of at least 30 years, our representatives chose time and again not to act on mounting evidence that something needed to be done to prevent a disaster in a high-rise building. They deliberately ran down, neglected and privatised the arms of the state which might have otherwise avoided the need for this book. And they allied themselves with a corporate world that evinced an almost psychopathic disregard for human life.”

New Labour allied itself with a corporate world that “evinced an almost psychopathic disregard for human life”. Indeed they facilitated it. Today when the Labour leadership says they are with ‘the builders, not the blockers’, it is still these builders who dominate the market. Are they going to facilitate their super-profits at exorbitant prices?

At the Labour Party National Policy Forum which has just taken place, the leadership fended off attempts to commit them to specific targets for council and social housing. Lisa Nandy’s seeming commitment to turn social housing into “the second housing tenure” is not included in the final document. So it appears that the only specific target is the 70 per cent home ownership. Even this is unfeasible because it would require more than 1.5 million extra homes. The building oligopoly will not listen to the appeals of the Labour leadership to drive up housebuilding numbers. They will use their domination of the market to build as they please to maximise their profits.

Keir Starmer naively said that when he talks to builders they tell him that planning is an obstacle. Voilà, remove this obstacle and they will increase new build. Yet the big builders have more than 600,000 plots lined up. Even the Financial Times has recognised that the big builders and developers will not resolve the housing crisis and that public housing is required:

“The fact is that private developers, left to their own devices, will not build enough to meet demand, especially when the greatest need is for affordable rented housing in urban areas. It is not in their interest to do so, since the result would be lower house prices and land values, eroding their profitability.”

   Promoting speculative building by the housebuilding oligopoly will not resolve the housing crisis. Reintroducing a building target which is tenure-blind will only promote their interests. A return to large scale council housebuilding will be necessary for the same reason that a Tory-Liberal coalition first funded council housebuilding in 1919: the major builders will not build for social need. In the market ‘need’ is only measured by the ability to buy, not the social conditions in which millions are forced to live by the acute shortage of council housing and the unaffordability of market homes.

Labour’s priority should be building the council housing that will get the 100,000 families out of temporary accommodation and liberate the younger generation from the private rented sector.

Martin Wicks is a member of South Swindon CLP.