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Should new-build buyers hold back 5% of purchase price as ‘insurance’?

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The think-tank recommendation would mean the developer has to fix all defects before being paid in full - and it's being considered by government
Should new-build buyers hold back 5% of purchase price as ‘insurance’?

Customers buying newly built homes should be able to hold back 5% of the purchase price until the housebuilder has fixed any problems or defects with the property, a think-tank has said.

The Social Market Foundation said that ‘new rules are needed to fix a broken and uncompetitive market for new-build housing where builders can prioritise profits over customers’.

In its latest report the SMF accused some housebuilders of having a ‘culture of neglecting customers’, and called on the Government to do more to boost consumer power and back new entrants to the market.

Profits before people?

The report comes amid growing focus on the quality of new-build housing, and the profits reported by builders, whose customers are often left unhappy.

Salima Ali, the report’s author, said: “Buying a new home is the biggest purchase most people will ever make, but the market doesn’t work well for many consumers. They should have more information about housebuilders and more power to push builders to fix problems with new homes.

“Housebuilders should also face more competition: they’re not under enough pressure to provide the better, cheaper houses that consumers want. It’s too easy for them to sell homes that leave buyers unhappy while making large profits. A better market would push them to work harder and give their customers a better deal.”

James Brokenshire MP, Secretary of State for Housing, Communities and Local Government, added: “This report highlights a number of challenges around quality of build and the approach of certain parts of the market that are, quite frankly unacceptable.

“Where we need to, we will act to protect consumers and ensure the market rewards quality, consistency and customer service. I will consider the recommendations made with interest.”

Key findings

Over the last 30 years, there has been an 80% reduction in the number of small housebuilders, said the SMF. The decline of small housebuilders, along with the consolidation of larger housebuilders means the market has become more concentrated in recent years.

There’s also a gap between consumer expectations of quality and the quality delivered by housebuilders. 99% of new homeowners reported problems including snags or defects since they moved in, and of these, 69% had over five problems.

The report found that it’s difficult for consumers to access redress for problems with new homes. The system is complex and difficult to navigate, and homebuyers are not well informed about what their warranty covers.

New homes are not always well connected to transport or amenities. The SMF noted that almost half of new homes (46%) are not within reasonable walking distance of the nearest railway station.

The think-tank’s recommendations

The SMF has suggested a package of measures to improve competition and choice in the new-build market, including:

  • The introduction of a detailed information package to be made available to prospective homebuyers. By providing this information, consumers would be able to compare between their options and make a more informed choice.
  • Support of small and medium builders in the market, through reviewing and adapting existing policies.
  • Improvement of the current warranty mechanism, which does not provide enough support for consumers.
  • Allowing homebuyers to withhold 5% of the price of the new-build home, which can then be used by the housebuilder to fix any snagging issues. A similar scheme is operating successfully in the Netherlands.

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