The report from the Federation of Master Builders (FMB) has revealed two thirds of medium sized developers can't find land to develop, making it impossible to build enough homes to meet the nation's growing housing demand.
FMB's chief executive, Brian Berry, said councils are blocking the development of smaller sites, which is hitting small and medium-sized developers.
Berry said: "The biggest challenge facing small and medium house builders is the planning process. Councils need to find a way of allocating and granting planning permission for more small sites.
"The current focus on large sites is squeezing out smaller developers, which is reducing competition in the housing market at a time when we need more, not less, choice.
"The limited supply of opportunities for small scale development is one of a number of key structural constraints that has seen the number of homes built by small and medium builders decline from around two thirds in the late 1980s to less than a quarter today."
Off-site construction is a much-hyped construction technique that is helping developers build houses on small sites. In London, small developer Pocket builds homes in a factory and then assembles them quickly on site, minimising the noise and disruption to residents next to the development. This allows Pocket to gain permission to build in small spaces throughout London.
Aside from planning constraints, the skills shortage is also holding back builders. Forty per cent of those surveyed said they think the lack of workers with construction skills is hurting development. Last year, 27 per cent said the skills crisis was a constraint on housing supply.
Government cuts are also slowing house building - developers said that inadequate resourcing of planning departments is the biggest cause of delays in the planning process.
FMB said in its report:
Small and medium house builders continue to express concerns around the disproportionate costs and delay experienced in bringing relatively small scale developments through the planning system.
These factors increase the risk of bringing forward applications to a degree which can be an inhibiting factor for many small firms.