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Those left to pick up the bill shut out of building crisis debate

Posted by on July 24th, 2019 · Cities, Construction, Government, Housing, Housing conditions, Law, Sydney, urban renewal

By Prof Bill Randolph, Director, City Futures Research Centre. This article was originally published by the Sydney Morning Herald.

The news that the Australian Building Ministers Forum is now acting on the recommendations of the Shergold-Weir report into building defects is a welcome sign that at long last the failings of the development industry to control building quality have started to be taken seriously. But it’s taken a series of shocking revelations, accompanied by pictures of distressed residents clutching cats and children as they file out of their condemned homes, to spur politicians and the bureaucracies that support them into action.

In an industry dogged by complex state-based legislation, inconsistent and weak compliance regimes, poorly integrated regulatory frameworks, competing incentives and competency gaps among trades, poor record keeping and sheer competitive pressure, the development industry has pretty much been given a free reign to set its own standards and police itself. The success of the development sector in pushing back regulatory oversight, lobbying for increasingly permissive planning frameworks and avoiding responsibility for poor quality building has had an inevitable and predictable outcome. This approach has failed the consumer.

The scramble to apportion blame between the complex chain of actors involved in the recent building scandals exposes the risk-shifting behaviour rampant in the industry. The now widespread “design and construct” sub-contractor procurement approach, which relies on builders to adapt the designs and specifications as they go, has further disrupted the capacity of the sector to deliver a quality outcome. .

The proposals of the NSW government in its recent Building Stronger Foundations discussion paper to take a “zero-tolerance” approach to non-compliant certifiers, ensure ‘building professionals’ are registered (always assuming anyone will insure them) and appointing a Building Commissioner, all sound good in theory but may prove more difficult to implement in practice without significant resourcing and real teeth. Calls to bring back suitably qualified and independent Clerks of Work or consulting architects or engineers to oversee a development from start to finish may offer an alternative solution.

Missing from current debates has been the key role the finance sector has played in requiring pre-sales before developers can access development finance. This marketing approach lays the seeds of much of what subsequently happens. In buying “off-the-plan”, the buyer is committing to buy an apartment on the basis of very limited information about what will actually be built – often little more than that contained in a glossy brochure. Would you buy a new car under similar conditions? Of course not.

“Information asymmetry” in favour of the developer is a fundamental feature of the apartment market and a clear sign of market failure. Even for purchasers of existing apartments, it is often very difficult to obtain clear, comprehensive or reliable information about the state of the building. Nor is it feasible to have an entire high-rise inspected before settling on a purchase and yet apartment owners are entering, largely blindly, into joint ownership of these often massive and complex buildings, based on little else but trust in a system that has now been shown to have failed dismally.

The lowly position of the consumer in the process was graphically exposed last week. In the list of the government ministers and industry heavyweights who attended the Building Ministers Forum, there was no one representing the most important stakeholder of all – apartment owners. Neither were strata managers nor strata solicitors at the table. It is indicative of the whole shambles that those who are left to pick up the bill and deal with the consequences are not included as part of the solution.

While the implementation of the Shergold-Weir report’s recommendations will improve building quality control in the longer term, there’s nothing the ministers’ communique or the NSW proposals for the many owners who are experiencing, or will soon face, the trauma of dealing with substantial defects in existing buildings. An obligation on the development industry of a legally enshrined “duty of care” to subsequent owners, also proposed in the NSW government’s discussion paper, is a positive move. But given the costs involved, legal action should be a last resort. Further reforms are needed to make the process of cost recovery by owners as simple and streamlined as possible, without delaying actions through disputes or uncertainty over the appropriate respondent, and without the potential for developers to “phoenix” themselves and escape their responsibilities.

What’s needed is a wholesale revamp of the culture of the apartment development industry that puts the needs of the consumer first, not a distant last. The industry needs to embrace a culture of change or face a continued crisis of trust.

There’s a lot resting on getting this right, not least the capacity of Sydney to accommodate the 8 million people it’s expected to house by 2056. We can only hope the development industry takes ownership of its failings and, with the help of the proposed reforms, puts its house – or perhaps its apartment – in order.

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