Cracks in building regulation could bring the building industry down

What happens to the Sydney property market and the residential construction industry if potential buyers do what they should be doing and avoid buying off-the-plan and recent developments in NSW at all costs because there’s no guarantee they’re defect-free and will retain their value?

First Opal Tower in Sydney’s west — from which many residents are still locked out, six months on, and in which many owners are financially trapped, unable to sell apartments rapidly declining in value. Now there’s Mascot Towers, a ten-year old apartment building in Sydney’s east that may have been damaged by construction next door, or may have fallen victim to the same problem as Opal Towers: the rotten building certification system in NSW.

Apartment owners who’ve been through the Byzantine process of trying to hold someone, anyone, to account for major building defects are taking to the media to warn people not to buy new builds. 

This is what happens when governments let corporations have their way, regardless of the impact on consumers. We saw it with financial services. How many tens of billions of dollars did the big four banks and AMP rip off from their customers via retail super funds while the Coalition tried to roll back regulation and cut funding to the corporate regulator? Australians will be paying for that for decades to come in lost retirement savings and higher pension payments. But that could be dwarfed by the value destruction if property buyers in NSW work out they can’t be sure of what they’re buying and stampede for older housing stock.

The problem has been obvious for years: in 2017, a ministerial forum ordered a review of “the effectiveness of compliance and enforcement systems for the building and construction industry across Australia”. The result was a damning report by Peter Shergold and Bronwyn Weir that revealed a long list of problems recurring time and again in new construction right across Australia, and the inability or unwillingness of government bodies to prevent them or drive the perpetrators out of the industry.

But even after Opal Tower forced the Berejiklian government to promise urgent action, two years on there’s been limited progress in implementing the Shergold-Weir recommendations. Few of the commitments by the NSW government in the wake of Opal Tower have even made it to parliament.

A recent report by academics from Deakin and Griffith universities confirmed the bleak picture painted by Shergold and Weir, with the overwhelming majority of new apartment buildings on the east coast having defects — including 97% of NSW builds (another 2012 study found 85% of new apartments had defects). Chasing those responsible for the defects — builders and developers — is also problematic, especially with companies able to use insolvency to avoid paying to remedy problems identified by owners after completion. That, too, is a problem that’s been well-known for years, with little done about it.

The result is an industry where apartment owners risk their financial future on a caveat emptor system of regulation — and where developers and builders who work to appropriate standards have to compete with dodgy rivals. How soon before the kind of shift we saw during the financial services royal commission — when customers fled retail super funds on realising they were being ripped off — strikes the residential construction industry?

That industry is already in trouble. In the March quarter, the value of new non-house dwelling construction in NSW fell 7% and is back to 2017 levels. Australia-wide, it fell 4%. Further back up the chain, dwelling approvals for apartments and other non-house dwellings in NSW have been below 3000 per month since August, after being above 3000 a month since 2014. Nationally approvals are at around 6000 a month compared to 8000 and 9000 two years ago.

“The great home building downturn has started,” the AFR noted in April. Builders are laying off workers, some marginal companies have started to go under. The industry — one of Australia’s biggest employers — is on the cusp of a serious downturn.

The neoliberal free-for-all that successive governments have created around building standards could push it in, at a time when there’s precious little else besides government spending propping up Australia’s economic growth.