The high price of housing is undermining society and the economy

 Alan Kohler’s The Great Divide: Australia’s Housing Mess and How to Fix It

 

There is widespread agreement that the housing market in Australia has developed serious problems. Houses and apartments are too expensive, too hot, and often too far away. There is a shortage of stock, and too few new ones are being built. Opinions on both causes and solutions range from economically irrational to unrealistically ambitious to unhinged optimism, and usually reflect one or another of the many vested interests involved. Federal and state governments have their targets, political parties have their competing policy platforms, developers, builders, banks and manufacturers have their industry associations, owners, tenants and consumers have advocacy groups. Local councils are typically spear carriers for the not-in-my-backyard (NIMBY) movement, but recent elections have seen yes-in-my-backyard (YIMBY) candidates. It is not just the market that’s a mess, the debate over housing policy is as well. 

 

Into this cacophony Alan Kohler is trying to introduce a note of reason with his book The Great Divide. He is a journalist and former editor of the Australian Financial Review, and while not a vested interest he declares himself one of the home owners who have benefited from the increase in house prices over the last few decades. He says that ‘escalation in house prices is a pain that has altered Australian society. It has increased inequality and profoundly changed the relationship between generations – between those who have a house and those who don’t. It has caused a rental crisis, a dearth of public housing and a mortgage crunch’. 

 

The first three chapters outline the problem. Fundamentally, this is because the median house price in Australia has doubled as a multiple of average weekly earnings in the past 25 years, from three to four to seven or eight times, increasing household debt from half to twice average disposable income and from 40% of GDP to 120%. ‘This is the most important single fact about the Australian economy’. Chapter two has data on the housing market and chapter three the history of housing policy. In chapter seven he argues for U.S. style 30 year fixed rate mortgages. Although Australia has the world’s highest house price to income ratio and the 66% of total lending for residential real estate by bank levels is also the world’s highest, Australian banks only provide floating rate mortgages. There are also chapters on homelessness and the global nature of the housing crisis. In this review the focus is on Kohler’s analysis of supply and demand for Australian housing, which includes all types of dwellings (detached and semi-detached houses, town houses, low and high-rise apartments). 

 

The Supply Side

 

Three chapters are on supply problems, covering public housing, Australia’s ‘crowded sprawl’, and state and local governments. In 1945 the Commonwealth State Housing Agreement provided federal funding for public housing, ‘the first and only serious housing policy in Australia’. Between 1947 and 1961 governments built 24% of new housing and home ownership increased from 53.4% to 71.4%, due to war service loans to veterans and the Menzies Government forcing the states to sell public housing. Under Menzies ‘public housing increasingly became a matter of welfare and social services’ rather than the ‘right of every citizen’ as in the 1945 Agreement. The ‘disappearance of public housing removed what had been a steady flow of affordable housing’. Today’s governments are not going start building houses themselves, as they used to, but relying on developers to increase housing supply and improve affordability ignores the basics of the business model of profitable property development, which is to meet demand but not flood the market with new stock. 

 

The second supply problem is the ’crowded sprawl’, the Australian pattern of settlement and urban development. We are crowded into a few large cities despite living on a large continent with a lot of space, 40% of people are in Sydney and Melbourne and over 90% are in capital and regional cities, and our cities are low density, sprawling outwards from a single city centre with houses on large blocks in new suburbs that were built without public transport after cars became affordable. 

 

Finally, while the federal government and banks encourage demand for housing, state and local governments restrict supply through their zoning and planning laws. The local councils and residents of the new post-war suburbs immediately became NIMBYs, and made it impossible for developers to get both sites and permission for medium density town houses and four storey apartments. Australia’s ‘archaic planning laws’ have created cities with high rise apartments around the city centre and low rise to the fringe, and the missing middle of town houses and low-rise apartments ‘remains as much a problem today as it was forty years ago’. While there are many potential sites in existing suburbs that could deliver new homes that aren’t 12 or 20 storey apartment buildings, developing them will need different planning and tax rules.

 

What is missing from Kohler’s analysis is increasing supply using modern methods of construction, like prefabrication and offsite manufacturing. These reduce the time it takes to complete onsite work, and so can increase the number of houses delivered without needing more workers. Currently this is typically used for buildings like schools and hospitals and social housing, for example QBuild in Queensland is manufacturing 600 new houses this year for regional centres, and NSW and Victoria have started prefab social housing programs. Although not the solution to the housing crisis, more government built or purchased prefab for social and affordable housing could play an important role in addressing the problems of homelessness and affordability for low income households if the barriers to adoption were lower and production capacity was increased. 

 

The Demand Side

 

Chapter eight is on the explosion in demand as four factors increased demand for housing after 2000. First, in 1999 the Howard government cut the capital gains tax (CGT) introduced by the Hawke Government in 1985 by 50%, and second, in 2000 reintroduced first home buyers grants. Third, in 2001 the Reserve Bank reduced interest rates, and fourth, between 2003 and 2009 net migration tripled. These boosts in demand were not matched by an increase in the supply of houses.

 

Australia has a unique system of negative gearing, that allows deduction of interest payments and losses on an investment from other income. The Hawke Government banned negative gearing in 1985 but, after a determined campaign, reinstated it in 1987. ‘The halving of CGT was the kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment into the leaping flame of everybody’s tax avoidance scheme’ as the 50% discount to CGT led to an immediate surge in investor demand for housing. In other countries investing in real estate is for rental income, but in Australia its ‘about getting an income tax deduction and then a capital gain’, and because institutions don’t get the tax deduction they can’t compete to buy sites and there is no build to rent market providing long leases here either.  

 

Adding more fuel to the flames were interest rate cuts by the Reserve Bank in 2001, after a US share market meltdown in the ‘tech wreck’, and investors bought property funded by cheap debt. Also, the Howard government reintroduced first home buyers grants in 2000, also adding to demand. Since then first home buyers grants have been provided by both federal and state governments, but these are ‘political attempts to appear to be doing something while making things worse’. The Homebuilder programme during the COVID pandemic was a particularly egregious example [1].

 

Another of the causes of the housing affordability crisis is excess immigration, and the problem with immigration is that the government doesn’t control it. Most of Australia’s migrant intake has been outsourced to universities and colleges, who see new arrivals as customers rather than migrants. The foundations of this were laid in 2001, when two changes were made by the Howard government when Philip Ruddock was Immigration Minister. First, entry from ‘non-gazetted’ countries like India, Pakistan and China, was opened up and streamlined, and second, there was a more transparent and open pathway to permanent residency for foreign students. The foreign student changes took a few years to get going, but between 2005 and 2008 Australia’s overall migrant intake tripled to more than 300,000 a year. Keeping Australia’s population growth to something approaching the actual capacity of the construction industry to build houses by reducing immigration is not going to be easily done. 

 

The outcome of CGT breaks and negative gearing, lower interest rates, first home buyer grants, and more immigrants, was that after 2000 the ‘nitro of a surge in demand mixed with the glycerine of existing restricted supply to create an explosion that has blown up’ both Australia’s society and economy. There are three other important demand side factors not discussed in the book. The first is the decline in household size, which has fallen from an average 2.9 people in the mid-1980s to less than 2.5 people now, with an increase in the number of one person households. Over the last ten years this trend has increased the number of households by over one million, and thus added a million houses to demand. The second factor is short stay rentals like Airbnb. While these are estimated to account for only 2.2% of long term rental accommodation, in regional towns with limited housing they have had a major effect on both availability and affordability. A third factor is stamp duty acting as a barrier to downsizing from large family homes with empty bedrooms. 

 

Solutions

 

The most important chapter in the book is on potential solutions to the housing crisis. What is striking about Kohler’s ideas is that they are not the standard mix of demand side reforms to tax, or supply side reforms to regulation and planning. He describes their advocates as Tribe 1 and Tribe 2, who have spent the last few decades arguing between themselves for their preferred reform option/s without affecting the housing market or house prices. ‘Solutions by the dozen have been proposed’ but he asks ‘what’s the aim, exactly … what’s the real national mood, and therefore the politics?’

 

The politics are simple. A majority of homes are owned (65%) so two-thirds of the population wants to restrict supply, and owners, banks, developers and state and federal politicians all want house prices to rise for their own reasons. ‘Renters don’t stand a chance.’ Any attempt to address affordability and the shortage of rental accommodation ‘would have to contradict the interests of a majority of citizens and those with the most power.’ And that is why governments have targets that ‘are never actual promises to build anything, just aspirational forecasts’.

 

Improving housing affordability by returning the house price to income ratio back to three to four times, instead of the current seven to eight, would take 20 years of oversupply and stable prices. However, as Kohler says, house prices are not going to halve, so they ‘need to stay put for a while and allow incomes to catch up’. This is difficult when ‘Half of Australia’s home owners are locked into a wealth-creation partnership with a bank’ and ‘everybody regards housing as an appreciating asset’. As a result ‘there is no consensus there is a problem … let alone how to fix it’. 

 

What can be done? First, limit negative gearing to new builds and reduce CGT to 25%. Second, link immigration to construction industry capacity, at around 2.5 times the number of housing approvals. Third, pressure local councils within 30 kilometres of the CBD using both carrots and sticks to increase density. Fourth, increase the cost of holding undeveloped land so developers cannot landbank so profitably. And fifth, extend cities and increase the supply of well-located land (i.e. with access to jobs and services) by building fast trains so commuters can live in regional towns and get into the city in an hour. Not a mythical ‘very fast train’, but a good fast train travelling at 100-150kph would double or triple the commutable distance from the capital cities. 

 

For many years this has also been my preferred solution to the housing crisis. The reason houses are so expensive is that urban land in and around capital cities is expensive, it is not due to the cost of building a house or block of apartments. Cheap land means cheap housing. Currently, government policy on housing affordability is to increase density by building apartments near existing train stations because it costs them less than building new regional railway lines and train stations. 

 

 For whatever reason, Kohler does not include any discussion of financing regional fast trains through betterment taxes, also known as value-capture taxes. These are used to fund projects from the increased value of land when new infrastructure is provided. For example, governments can establish a levy before the preferred routes and sites of train stations and other infrastructure are announced and land values increase. In the ACT, a betterment tax is levied at 75% of the uplift in land value after a site is rezoned, an important point not included in the book. Another, more difficult, option is to allow a private sector consortium to build the railway and finance it through development rights on a corridor of adjacent land. 

 

Conclusion

 

As a journalist who has been covering financial markets and economics for four decades Kohler’s writing is clear and concise, and the measured tone of the book will be familiar to anyone who listens to his nightly finance segment on ABC News. But there is an undertone of anger throughout the book, he argues housing is a ‘stunning failure of public policy’ at all levels that has changed Australian society for the worse. He says ‘My view, and the basis of this book, is … that the high price of housing is undermining social cohesion and the proper functioning of the economy and the nation’. The cost of housing has created a generation of insecure renters and working poor, because the supply of housing is so inadequate. 

 

To solve the housing problem needs a policy with a clear, explicit aim. Kohler argues this should be improving affordability by increasing supply in and around the capital cities. ‘Merely bringing the rate of increase in house prices back to the rate of growth in incomes isn’t enough – that ratio needs to come down so it isn’t a stretch to buy a place to live’. NIMBYs, consumer preference for houses, and construction costs, make building new high-rise apartments in existing inner suburbs difficult, which is why he believes the solution to more housing supply must be fast trains to regional areas that open up cheap land for subdivision. This would be expensive and require federal funding, but ‘every other solution looks too hard’.

 

Over the decades hundreds of reports and research papers on Australian housing have accumulated. However, although Kohler has used many of them, his book is very much a personal statement. He is not an advocate for any industry or other interest groups, but believes the high price of housing is undermining society and the economy and this is a problem that needs to be addressed effectively and quickly. Solving Australia’s housing mess ‘requires true political leadership – that is, doing something right that’s unpopular’. Like so many other key points made in this book, that is both correct and deeply troubling. 

 

Coda

 

After governments shifted the cost of infrastructure like roads, water and sewerage to developers in the 1990s, this is now included in the price of a house instead of the tax system. The GST in 2000 added another 10%, and state governments have increased stamp duty. As a result, 30 to 40% of the cost of a new house is now government taxes and charges. 

 

Tax reform is essential. Windfall gains from rezoning and new infrastructure should be taxed. Housing should be regarded as a right, and on the list of essentials excluded from GST. Halving the CGT discount and restricting negative gearing will reduce demand. 

 

Supply can be increased through innovation, lowering regulatory and financing barriers to modern methods of construction, and streamlining the planning and approvals process. Governments should also address inconsistent national occupational licensing systems and improve support for apprentices to increase labour supply. 

 

Developing and constructing housing requires compliance with layers of regulation by three levels of government on where housing can be built, how housing should be built, and what housing should look like. Other regulations are indirect, such as environmental regulations. These regulations are necessary to ensure safety and quality, but increase the cost of houses, and at a minimum should be reviewed to improve consistency across approvals, certification, compliance and enforcement. 

 

In some places housing policy is based on an assessment of the need for different types of housing, however Australia’s housing targets are for a total number (i.e. total need). But they could be set with different numbers for social rented housing, intermediate rented housing, market rented and built-for-sale homes. 

 

Many European cities zone certain areas with minimum, non-negotiable amounts of affordable and social house building. France requires municipalities to ensure 25% of their housing stock is available for social renting and fines them if they don’t. Vienna has a zoning programme which only grants building permits on the condition of builders meeting affordable and social percentages. These rules get incorporated into the value of land in the zoned areas, which acts to make higher levels of social housing viable. 

 

Currently, residential development land is valued on the basis of maximum profit, and social housing is added in afterwards. Construction costs are high, but it is the cost of the land which makes social housing unaffordable. However, land value is set by what is allowed to be built, and although enforcing a high level of social housing would cut developer profits, the land will be cheaper. The planning system could also require public land which is being repurposed for residential housing be retained by the public sector for social housing developments, instead of being sold off to the highest bidder. 

 

A national tenancy code with 10 year leases and levies on short-term rentals is essential. Other options are removing stamp duty for downsizers, increasing the depreciation allowance on new residential buildings, and taxing developers with undeveloped sites who landbank approved projects. There is no one simple solution to the housing crisis, but there are many ways it could be addressed and incremental small steps might be the only way to make progress. 

 

 

Alan Kohler, 2023. The Great Divide: Australia’s Housing Mess and How to Fix It, Black Inc. 

 

[1] A previous post was on the Homebuilder program

 

 

 

The NSW Construction Reform Strategy

 Compliance and quality in new residential buildings

 

The National Construction Code (NCC) is a performance-based regulatory system that provides the standards buildings must comply with, supported by reference documents from Australian Standards, the Australian Building Code Board (ABCB), and other protocols and standards. The Building Code of Australia (BCA) sits within the NCC and is given effect by state and territory legislation. These regulations cover building work, products, and registration or licensing requirements for practitioners, and their objectives are the proper construction of buildings and the health and safety of the people using those buildings. Although construction is extensively regulated through the NCC under both state and federal legislation, during a boom in apartment building after 2014 the number of defects in these new buildings became a major issue. 

 

Figure 1. NSW apartment building

Source: ABS 870102. 

 

After a series of building failures highlighted widespread lack of compliance with the NCC, Bronwyn Weir and Peter Shergold were asked to investigate. Their report in 2018 Building Confidence: Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry across Australia found: 

• Compliance failures included non-compliant cladding, water ingress, structurally unsound roof construction and poorly constructed fire resisting elements; 
• Practitioners may lack competence and do not understand the NCC; 
• Design documentation was generally poor and resulted in inadequate information; 
• Licensing bodies, regulators and local governments were inadequately funded or lacked skills and resources; and 
• Supervision has generally been by private building surveyors who are not independent from builders and/or designers. 

 

The report made 24 recommendations. Recommendation 1 was for registration of building practitioners involved in the design, construction and maintenance of buildings, and 10 was for building surveyors. Recommendation 3 was for practitioners to undertake compulsory Continuing Professional Development on the NCC. The key recommendations 6 and 7 were for effective regulatory powers and proactive regulation, with mandatory inspections (recommendations 18 and 19), and recommendation 21 for compulsory product certification. Recommendation 8 was for a design review relating to fire fighting, and 17 was for an independent third-party review of the designs before work commences. Other recommendations were 12, for a building information database that provides a centralised source of building design and construction documentation, and 20 for a building manual for commercial buildings to be available on completion. 

 

These recommendations addressed the serious problems of building defects and non-compliant materials that were the primary motivation for the Building Confidence report. The report concluded ‘The compliance and enforcement systems have not been adequate to prevent these problems from emerging and they need to change as a matter of priority. There is no panacea or ‘silver bullet’ to resolve these problems. Our 24 recommendations … will address weaknesses in a … pragmatic, risk-based approach’ (p. 4). 

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result.

 

The NSW Reform Strategy 

 

The New South Wales Government responded to the Building Confidence report with the Construct NSW strategy, which had six elements: regulation, key player ratings, education, contracts, digital tools, and data and research. In 2019 the Berejiklian Government established the Office of the Building Commissioner (OBC) to implement the reform strategy and appointed industry veteran David Chandler as Building Commissioner. In 2020 two significant pieces of legislation to regulate new construction work were introduced. With these Acts the Building Commissioner could audit building plans, monitor and scrutinise suspected wrongdoing, and take disciplinary actions such as suspending or cancelling registrations, refusing to issue occupation certificates, and ordering rectification of non-compliant building work.

 

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) allowed the OBC and Department of Customer Service to investigate building work and require rectification of defects for up to six years after the occupation certificate was granted. The Department can delay issue of an occupation certificate until identified issues are addressed, and these orders are public while they remain in force. The definition of a ‘serious defect’ in the Act is a failure to comply with the BCA, Australian Standards or approved plans. The RAB Act gives the Building Commissioner powers to enter construction sites and issue orders for the rectification of serious defects before occupation certificates can be given.

 

The most significant power requires developers to sign enforceable undertakings that the developer refrain from certain conduct which contravenes the Act or take action to prevent or remedy a contravention of the Act. A Building Work Rectification Order requires developers or principal contractors to remediate serious defects prior to the issue of an occupation certificate, and a Stop Work Order is issued if the Building Commissioner is satisfied that work being done could result in significant harm or loss to the public or occupiers of the building.

 

The second piece of legislation was the Design and Building Practitioners Act 2020 (DBP Act), which had three requirements:

1. New registration requirements for designers, engineers, specialists and builders to show they are adequately qualified;
2. To require designers to lodge building designs before construction starts, and builders lodge ‘as-built’ plans upon completion. Builders must also declare that the completed building complies with the lodged designs and the BCA. The requirements on practitioners to register, lodge plans and make declarations came into force in July 2021; and
3. A statutory duty of care for practitioners, so owners can sue if a person who carries out construction work fails to exercise reasonable care to avoid economic loss caused by defects. The duty of care has been in force since June 2020 and applies retrospectively, where economic loss has become apparent in the 10 years prior to 2020.

 

The DBP Act imposed a retrospective statutory duty of care to avoid economic loss caused by defects or construction work. It applies to professionals who perform construction work including builders, designers, product manufacturers and suppliers. In July 2021 the second stage of the Act introduced compulsory insurance, declarations to be given by designers and builders to ensure compliance with the BCA, and a registration regime for engineers. 

 

Also, in July 2020 the Building and Development Certifiers Act 2018 and the Building and Development Certifiers Regulation 2020 came into effect, with stronger conflict of interest provisions and penalties for breaches by certifiers. The Act and Regulation include similar provisions to those in the DBP Act for building and design practitioners to be registered, for suspension or cancellation of registration, and having adequate and current insurance. The NSW Department of Fair Trading provides a certifier practise standard, a condition of licence for all certifiers working on multi-storey Class 2 buildings [1].

 

Another initiative was micro-credential TAFE courses being offered to practitioners. There are now three dozen of these courses available, ranging from asbestos to waterproofing, with courses specifically on the NSW legislation and its operation, the NCC, and fire and rescue requirements.

 

Further Developments 

 

Since the legislation in 2020 there have been two other NSW Government policies introduced, two court cases, a Strata Hub and a Defects Library created. A new agency was formed when the Building Commission NSW commenced on 1 December 2023, bringing together the Office of the Building Commissioner and NSW Fair Trading building functions into a single specialised organisation focused on quality and compliance of residential buildings employing over 400 people.

 

In November 2022 the NSW Government started Project Intervene, a program to resolve serious defects in the common property of buildings that are up to ten years old. The Department of Fair Trading negotiates a legally binding undertaking with the developer for the benefit of the owners corporation. A building is not eligible for Project Intervene if the developer or the builder are no longer trading. Under Project Intervene, there was no cost to the owners corporation as the developer pays for the remediation works and all associated costs. Other defects might be remediated at the same time but are agreed to separately by the developer. An owners corporation could register for the program up to 30 June 2023, and 152 buildings registered involving 14,523 apartments.

 

Project Remediate was a 2022-2024 program to help remove combustible cladding on an estimated 225 buildings, of which over 135 are in process. It is a voluntary (opt-in) program that only fixes flammable cladding and offers a 10-year interest-free loan to fund remediation work [2]. Government support is provided to owners corporations through quality assurance and program management services, with a $10,00 to $15,000 payment to help cover strata management costs for participating in the program. 

 

In 2023 the NSW Court of Appeal in Roberts v Goodwin Street Developments confirmed an earlier Supreme Court decision that building practitioners owe a statutory duty of care under the DBP Act for all building work, not just residential building work or work on a Class 2 Building. The decision also confirmed owners can hold project managers, superintendents, directors and shadow directors personally responsible for building defects. 

 

The decision in Roberts extended the RAB Act’s definition of a serious defect to all buildings and the duty of care of individuals was confirmed. However, when designing a project, a number of designers and consultants will be involved, some of whom may work for one firm. How the duty of care is allocated between individuals that sign certificates and professional services firms that are contracted for work on a project was not clarified. The uncertainty around this issue was a factor in the significant increase in Professional Indemnity insurance premiums. 

 

In 2024 an Owners Corporation of a residential strata building brought proceedings against Pafburn (head contractor) and Madarina Pty Ltd (developer) for alleged negligence leading to defective construction work and breaching the statutory duty in the DBP Act. The High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 considered whether a developer or head contractor can reduce their liability when faced with claims and found head contractors cannot delegate works to avoid liability. 

 

The NSW Strata Hub was another initiative, establishing a register of strata schemes with information on the number of lots, the occupation certificate, strata scheme management information (committee secretary, strata manager, building manager, the annual general meeting) and the scheme’s energy and water performance rating where available. 

 

The Building Commission has created an online Building Defects Library that lists the most common building defects for Certifiers, Councils and other relevant industry members to help drafting of formal communication to rectify defects.

 

Developer and Contractor Ratings

 

Another element in the NSW reform strategy was the introduction of a ratings system for developers and contractors. This is called iCIRT (independent construction industry rating tool) and uses data on creditworthiness, insurance history, regulatory breaches and legal claims, to assign a rating available to government, industry and the public. Developed by Equifax, a credit rating firm, iCIRT ratings are based on a relative risk ranking. Businesses are assessed relative to others that share the same role (i.e. builders are compared with builders) and size (i.e. small firms with small firms) and a Development Risk Index compares a business to the industry average. These ratings are based on six criteria:

1. Character: the business, its directors and key persons, the holding company, related parties, shareholders and owners;
2. Capability: the tenure and trading history of the business and officeholders experience, licences and qualifications, the track record on previous projects and insurance and claims history;
3. Conduct: includes the commercial history, court judgments and litigation, industrial disputes, tribunal decisions, payments to employees and subcontractors, and any regulatory intervention;
4. Capacity:  the project pipeline and capacity to meet commitments, business solvency and ongoing sustainability;
5. Capital: capitalisation and funding sources, access to funding and borrowing capacity; and
6. Counterparties: the exposure of the business to related parties in the supply chain and capacity to withstand disruptions.

 

Equifax and iCIRT provide a star-rating outcome from zero stars (unrated) to five stars (more trustworthy) and there are three levels of assessment. Gold Ratings are a detailed assessment where the business and/or build team have fully participated and provided all requested disclosures for a comprehensive review, including key person consents for expanded background checks. Silver Ratings are a standard review where the business and/or build team have provided a number of required disclosures, with key person consents to basic background checks. Bronze Ratings are a brief review using all available public and proprietary data that does not require consent or the participation of the rated business or build team, with no key person checks. 

 

Despite ICIRT’s role in improving accountability and trustworthiness in NSW construction getting a rating is voluntary, as is making it publicly available once acquired. By February 2024 there were 163 builders and developers, plus a few architects and others, listed on the ‘Register of Trustworthy Constructors’. About a dozen had been withdrawn or not renewed and several were waiting for updates. 

 

In a LinkedIn post on Feb 6^th David Chandler said ‘The number of iCIRT rated builders and developers continues to grow. Recent statistics indicate that over 35% of builders and developers with turnover greater than $5.0m pa are now rated. These statistics further indicate that over 50% of developers and builders by volume are iCIRT rated in NSW.’

 

Decennial Liability Insurance

 

Decennial liability insurance (DLI) is an insurance product that enables owners corporations to have a serious defect fixed up to ten years after an apartment building is first occupied. With DLI the work is done without litigation to establish fault, removing a major barrier for owners corporations. In November 2022 the Building and Other Fair Trading Legislation Amendment Bill made DLI an option for developers of multi-storey apartment developments in NSW, so a developer with DLI will not be required to provide a building bond. NSW is the only Australian jurisdiction where DLI is offered, although it is available in over thirty countries.

 

DLI provides residential apartment owners with comprehensive consumer protection for building defects caused by substandard design and building work. It ensures that building owners can remediate those defects because the costs are covered by the insurance policy if a builder or developer is unable or unwilling to fix the defects, including if the developer becomes insolvent. There is currently one provider of DLI, Resilience Insurance.

 

DLI increases involvement of insurers in the design and construction of projects as they take a more active role in monitoring projects through technical inspections, site investigations or due diligence. Regular, independent technical inspections are the basis of DLI, and premiums for highly rated developers and builders should be lower than those with a lower rating and/or a history of buildings with defects. 

 

A fundamental problem had been a lack of supervision to ensure and maintain the quality of work on residential building projects. For contractors, responsibility for compliance with relevant codes and practices requires supervision from the issue of the construction certificate to hand over to the client. For developers, supervision is required to prevent an order under the RAB Act that will damage their reputation and affect consumer confidence in their product. With the ratings tools now available, the cost of independent design reviews and adequate supervision of work may be offset by reduced financing and insurance costs. 

 

Report on Progress in 2023

 

In 2023 a Review of the Implementation of Building Confidence recommendations was published by the Australian Construction Industry Forum, with details on the progress made on each recommendation across the states. Based on that report Bronwyn Weir gave an update on progress on the Building Confidencerecommendations in a webinar presented to the Australian Institute of Quantity Surveyors and the Australian Construction Industry Forum, reported by Andrew Heaton on Sourceable. According to Weir progress varied across jurisdictions. NSW was leading with increased compliance and enforcement and a proactive audit program. 

All states had or were working toward a compulsory code of conduct for building surveyors, and there had been improvements in accountability for performance solutions and performance-based design. The ABCB had developed model guidance so states and territories could implement recommendations in a nationally consistent way. On other recommendations implementation had been mixed. For example:

• Several states had broad schemes for mandatory registration of design and building practitioners, but none were as comprehensive as the National Registration Framework developed by the ABCB (recommendations 1 and 2 of the report).
• Only Tasmania required building practitioners to undergo compulsory continuing professional development on the NCC (recommendation 3).
• No state had instituted any substantive reforms to support career pathways for building surveyors and certifiers (recommendation 4).
• NSW and Victoria have increased regulatory compliance and enforcement action (recommendations 5, 6, 7, 9 and 11), Queensland and Western Australia have ‘light touch’ regulation.
• NSW had strengthened the role of fire authorities in building approval processes, however no state had instituted a code of conduct for fire safety engineers (recommendation 8).
• NSW had and some other states were working toward centralised digital lodgement of building approval documents (recommendation 12), but Queensland, Western Australia and Victoria are not. The ACT and Northern Territory were already doing this. 
• No jurisdiction required a comprehensive building manual be handed over to owners on building completion (recommendation 20).
• There had been insufficient action on regulation of building product compliance. Only Queensland had a supply chain accountability law.

 

Table 1A. Summary of progress in 2023

Table 1B. Summary of progress in 2023

Source. Table provided to Sourceable by Weir Legal and Consulting

 

Surveys on Building Defects

 

The NSW Building Commission has done two surveys on defects in apartment buildings. The 2021 survey on defects in strata buildings over three stories that were completed in the previous 6 years found:

• 39% of strata apartment buildings surveyed had a serious building defect in the common property.
• Of the buildings with a serious defect, most were related to waterproofing (63%), followed by fire safety systems (38%), structure (27%), enclosure (26%) and key services (17%).
• The time taken to resolve defects varied greatly across the sample, with around 38% of buildings taking over 12 months and 25% taking less than 6 months. 
• Only 15% of the buildings with serious defects were reported to NSW Fair Trading;
• The average cost of remediation was over $300,000 (including rectification work, legal expenses, and other professional services. Owners corporations were not able to recover these costs, which were covered by special levies (34%) or an increased annual budget (29%).

 

The second survey in 2023 found 53% of strata buildings in New South Wales had serious defects, the increase from 39% in 2021 suggesting increased engagement from strata communities [3]. The survey found that defects in newer buildings trending down since 2020, driven by a decrease in buildings with waterproofing serious defects, and consumers were more confident in reporting defects to the regulator. The most common defects were: Waterproofing (42%); Fire safety systems (24%); Building enclosures (19%); Structural issues (15%); and Key services, such as lifts and plumbing (14%).

 

 

Figure 1. NSW Defects survey

 

Source

 

In his Foreword to the 2023 survey Building Commissioner David Chandler [4] said: 

Since the commencement of the NSW Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 developers and builders associated with the construction of apartment buildings with serious defects are increasingly held accountable to fix them. As of 1 November 2023, 465 RAB-Act-related audits have been conducted involving more than 29,000 apartments. Development financiers are now paying attention to how they can lower these risks.

 

We are also seeing the positive impacts of the Design and Building Practitioners Act 2020. Since the DBP Act commenced in July 2021, 94 DBP Act audits have been conducted, involving over 10,000 apartments. Across NSW, apartments are now commencing with a much higher resolution of design before construction starts on site. This shift of approach is being reported by builders as leading to less rework, less waste and improved construction times. On-site we are observing far greater awareness of what compliant construction work looks like.

 

Conclusion

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result. Following the recommendations of the 2018 Building Confidence report on non-compliance with the BCA, building failures and defects, the NSW Office of the Building Commissioner was established in 2019 and David Chandler appointed Commissioner. In 2020 the Design and Building Practitioner Act and the Residential Apartment Building Act came into effect. The goal of the NSW reform strategy was to restore confidence in newly built apartment buildings. 

 

The issues addressed by the regulatory reforms in NSW were accountability for the quality of work done, and access to data and transparency about a building’s quality or lack of it. Under the 2020 legislation there are two key requirements:

1. Designers must design properties in compliance with the BCA; and 
2. Construction workers must build properties according to those designs and must build in compliance with the BCA.

To implement the strategy and enforce the legislation the OBC could inspect plans, visit sites, and stop work to prevent defects, and in David Chandler had a highly energetic and effective Building Commissioner. In 2023 the Building Commission NSW bought together the OBC and NSW Fair Trading building functions into a single agency employing over 400 people, focused on compliance of residential buildings.

 

Firms and their employees affected by the DBP Act have had to incorporate its requirement for registration into their business plans to operate in NSW. For many this is not onerous, but for some it is challenging. Similarly, getting an iCIRT rating is difficult for firms with a poor track record, but is an opportunity for good firms to establish themselves as trusted and trustworthy, and for their relationships with suppliers, consumers, insurers and financiers to benefit from being highly rated.

 

The iCIRT ratings scheme for constructors and developers identifies a ‘trustworthy building’ that is fit for purpose, resilient and measurably less risky for the owners, financiers and insurers. With the introduction of the iCIRT ratings scheme and Decennial Liability Insurance, NSW became a leader in increasing the accountability of developers and contractors. Although there are some similarities with insurance-based systems for regulating construction such as the Miller Act in the U.S. and the French system, the scope of the RAB and DBP Acts is wider and those other systems do not include the same inspection powers. 

 

The NSW Government’s Construct NSW strategy was a response to repeated failures in design, construction and certification of buildings. The objective of the NSW strategy was to restore public confidence in new buildings after high profile building failures and widespread defects, with the associated financial burden and misery for owners of affected apartments. This was a multi-pronged strategy based on a Building Commission with new powers for increased inspection of designs and building work, data driven audits of companies and projects, registration and education of practitioners, a ratings scheme for companies, and introduction of ten year defect insurance. This comprehensive strategy has placed NSW firmly at the forefront of construction industry reform in Australia. 

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[1] Class 2 buildings are multi-storey, multi-unit apartment buildings or mixed-use buildings with shops and apartments. 

 

[2] The problem of flammable cladding in Australia was covered in a previous post, on both the extent of the problem and the differences between the states in their response. 

 

[3] The time and cost of remedial work on defects has increased under the DBP Act because some work that previously was done after agreement between an Owners Corporation and contractor now requires a Development Application. 

 

[4] David Chandler’s term as Building Commissioner finished in mid-2024, and in October James Sherrard became the new Commissioner. While the Berejiklian Government gets the credit for establishing the Office of the Building Commissioner and passing the enabling legislation, Chandler was responsible for the success of the reform strategy.