The OFT announced the year-long review into the industry after raising fears the sector "was not working well for consumers".

The consumer watchdog said there was evidence standards of new build homes were slipping and supply was failing to keep up with demand.

House prices have rocketed over the past 10 years in what has been one of the country's longest ever housing booms, largely driven by a lack of supply of affordable homes in the property market.

A landmark review was conducted three years ago into housing supply, led by economist Kate Barker, in a bid to address the growing crisis that is preventing many from getting onto the property ladder.

The 2004 Barker Review recommended the introduction of a code of conduct among a number of measures aimed at improving build quality and supply. But the OFT, which has been monitoring the sector since then, said house-builders had failed to draw up a code of conduct and had made little progress in raising consumer satisfaction, with the quality of homes being built even going downhill since the review.

The OFT said: "There appears to be significant consumer detriment in the form of low supply response to sustained rising prices, low levels of quality and a lack of innovation."

The Home Builders Federation sought to defend the industry, saying it was "confident" the sector would be given a clean bill of health. However, there is mounting criticism that house-builders are purposefully controlling supply to keep house prices inflated. The Royal Town Planning Institute published results of a study last week suggesting the country's top 10 house-builders were sitting on 14,000 acres of land with planning permission, equivalent to 225,000 houses.

The OFT will look at whether competition and the planning system is allowing land suitable for development to be used to best effect. It will also assess the standard of properties being built and levels of customer satisfaction, although the review will not cover the environmental impact of new homes or the overall issue of where developments should take place across the UK.

The investigation, which will be the first of its kind for the market and could lead to a range of measures being introduced to keep the sector in check, will see an eight-strong team at the OFT will consult industry and consumer bodies, businesses, Government departments, local planning authorities and independent experts as part of the review, which it hopes to complete by next summer. Members of the public or other interested parties are also invited to give the OFT their views in writing by August 17.