31 JULY 2019 | Daily Top Story: Building failures and developer ecosystems: the tip of the iceberg

The fallout of this building crisis, at the end of the current property boom cycle, may see many developers close doors and get out of development activities. Apartment fire-sales may depress property prices generally and make housing more affordable. The crisis might trigger Parliament to set up an effective federal Independent Commission Against Corruption. However this crisis plays out one thing is certain, it won’t be easy or painless.

Residents out on the footpath after some 560 apartments were evacuated in Sydney? Wouldn’t we wonder “what would I do in this situation?”

Politicians, highly sensitive to expressions of community anxiety, are known to react quickly to defuse concerns. NSW Premier Berejiklian admitted recently:

“We allowed the [building] industry to self-regulate and it hasn’t worked. There are too many challenges, too many problems, and that’s why the government’s willing to legislate.”

On 18 July, state housing ministers met with the federal government to “work through issues” to address “the crisis of confidence in the building industry”. They have now agreed to consider all recommendations of the 2018 Shergold-Weir Report into compliance failures in recent building.

We don’t need reminding that housing has particular resonance, as shelter, comfort, security and sense of home. Housing is multi-dimensional –extending to survival, personal safety, political and community stability, investment, employment, wealth and status, well-being and health.

The many emerging stories of major building defects in recent apartment blocks in Sydney and Melbourne are exposing our notions of housing as safe and secure. Evidence of contaminated sites, building settlement, flammable wall cladding, concrete “cancer”, structural cracking, plumbing issues, noise between units, leaky roofs and floors, and flooding, all suggest systemic problems in the development sector.

Who are affected?

The construction sector has widespread connections within our community, in the building industry, and within governments. The development industry’s international networks and linkages are part of a global sustainability debate.

The current construction sector is a complex and dynamic ecosystem that has evolved locally over four decades. Any interventions of governments in the system will have unanticipated consequences across the system. The emerging crisis of unaffordable professional indemnity insurance premiums for consultants and certifiers in the sector is but one example.

For the development sector, building failures impact the property market, spooking governments, owners, investors and the property market. Uncertain financial conditions can destabilise the wider economy, increase unemployment, and given Australian households’ high debt levels, further limits consumption spending. This impacts political stability and risks of economic recession.

For apartment owners and investors who are directly impacted by building evacuations, or dealing with major defects and liabilities, the financial risks are high. Building defects drive property investment losses, and high repair costs through Owner Corporations at the end of legislated builder defects liability periods.

For renters and residents, major defects directly threaten health, safety, security and wellbeing. Renters are placed in a difficult situation, both unable to respond to defects, and reliant on owners and investors to address the problems in a timely manner. Investors caught in drawn-out legal disputes may be unwilling or unable to expend funds to ameliorate conditions. Evacuation of renters is very difficult without resources or capacity to relocate. There is little legal protection for tenants.

The current crisis is a red flag for social housing providers. Community housing sector characteristics include long-term tenant relationships and long-term building holdings. This means that ensuring building quality for durable, low maintenance accommodation is critical for the longer-term, unlike private market speculative development. Profit-driven developer models bring risks of cheaper materials and fittings, poor quality cut-price construction, and little capacity for residents to arrange defects liability repairs.

How did we get into this fix?

For several decades after the Second World War, social and communal values forged in economic depression and war were uncomfortable with the “classical economics” of Adam Smith and others from the 18th Century – of greater personal choice, individual enterprise and wealth accumulation. By contrast, post-war policies of western governments sought to reform institutions to better address social inequity and injustice, and redress suffering that the War had brought.

In the 1960s, increasing prosperity in western democracies saw neoliberal views re-emerge – that our freedoms were increasingly restricted by overbearing red tape and excessive regulation, big government is bad for us, and that the animal spirits of capitalism are needed to increase wealth and free up our societies. Today, Prime Minister Menzies might be labelled a socialist. Such has been the influence of Hollywood and the American Dream.

By the late 1970s, post-war institutions in Australia were being pressured to increase efficiencies, reduce regulation, and provide greater choice. Political figureheads Reagan and Thatcher led the charge to transform societies, supported by politicians, think tanks, and lobbyists. Shades of Gordon Gecko’s greed is good!

By the 1980s, construction and development businesses were establishing industry lobby groups to loosen labour market restrictions, rewrite building regulations, influence construction standards and move into design and construct contracts (D&C) and project management, to replace client and consultant oversighting and independence. Lobbying to reduce local government roles in development and building compliance was sold as reducing red tape.

In the rush for capital accumulation and profits, easy finance allowed developers to rapidly expand urban footprints, ignoring urban planning principles and practices. As developers grew, land banking to influence market supply and land prices, became common.

By the early 1980s, government reforms and restructures were well underway to adopt the new economic ideology of efficiency and choice, deregulation and scrapping of red tape, private market boom-bust cycles, and the accompanying loss of older institutional values and practices such as independent construction certification, and Clerk of Works roles to look after client interests on projects – the builder was the client.

Nearly 40 years on, we are now seeing the fruits of this culture – developers flaunting their wealth, apartment buildings with multiple construction defects impacting human safety and health, limited legal recourse for owners and lessees, minimal developer/contractor liability for defective work, ‘phoenix’ developers closing down after building completions, bankrupt sub-contractors, mounting insurance premiums, and minimal consumer protections. Apartments lose value and owners and investors have little recourse but to sell or pay Owners Corporation levies to repair damage, replace sub-standard materials and cut-price products, and address structural defects.

How do we get out of this fix?

Self-regulation in the Australian building industry has been a source of disquiet for authorities for years. Appeals to State governments and the Building Ministers Forum were mostly ignored.

The 2015 Lambert Review examined the NSW Building Professionals Act 2005 and the building regulation and certification system in NSW, did flag potential risks of unaffordable professional indemnity insurance for certifiers, and certifier laws were amended in the NSW Building and Development Certifiers Act 2018.

The 2018 Shergold-Weir Building Confidence Report for the Building Ministers Forum identified “serious compliance failures in recently constructed buildings”, and noted weak oversight by licensing bodies, state and territory regulators, and local governments. The report recommended compliance and enforcement of the construction industry nationally to improve regulation.

The NSW government response in February 2019 to the Shergold-Weir report proposed a NSW Building Commissioner to regulate the construction industry, providing oversight and enforcement, reforming compliance reporting, registering building practitioners for reporting obligations, and “clarify[ing] the law to ensure that building practitioners owe a duty of care to owners’ corporationssubsequent titleholders, and small construction-related businesses”.

The June 2019 NSW Government’s Building Stronger Foundations discussion paper recommended compliance audits under the 2018 Certifiers Act to include:

  • A major certifier compliance operation, with 25-30 per cent of the industry to be audited yearly;
  • A zero-tolerance approach to non-compliant certifiers including a policy of increased penalties for corruption and negligence
  • Better protection for strata buildings, with certifiers being banned from new strata developments if the Code of Conduct is breached in the last 12 months
  • Increased transparency, with more information on certifier compliance history for homeowners in an enhanced name and shame register

Additional key reforms in the June 2019 paper include:

  • Building designers to declare that their plans, specifications and performance solutions comply with the Building Code of Australia (BCA), and builders declare that buildings are built according to the declared plans
  • A new registration scheme for building designers;
  • An industry-wide duty of care owed to subsequent homeowners

The NSW government proposed that enabling legislation for these reforms would go to State Parliament by the end of 2019. Industry feedback on the scope of its reform proposals is sought to assess how the reforms ‘can be designed to work in the future’.

What more needs to be done?

Although the proposed NSW government building industry reforms are by themselves admirable attempts to better regulate the industry, there is a palpable sense that governments are tinkering around the edges of the larger and more complex development ecosystem.

The focus of recent inquiries, reports and reviews, have been generally confined by their terms of reference to practice reforms for smaller actors in the system such as designers, engineers, certifiers and surveyors. Much of the current focus of the crisis moves attention from the “big fish” controlling the development process.

A spotlight is needed on the roles and activities of the most powerful actor in the system, the property developer, to address community confidence in the building sector.

Property developers are top of the food chain – controlling investment decisions, landbanking, design development, costs, tendering, and quality control. Developers employ consultants, contractors and certifiers directly or indirectly, in design & construct contracts and value management exercises.

The development ecosystem that has evolved over the past four decades has incrementally shifted the goalposts from a regulated system constructing safe, well-built and long-lasting buildings, to allow an under-regulated get rich quick development culture with little legal responsibility or care for their products. The development sector has been a major beneficiary of deregulation.

The boom-bust’ property cycles of the property market also reward the development industry by controlling housing and land supply into the property market to manage demand and increase prices and profits. There is evidence of considerable influence in rezoning and regulatory decisions and approvals at all three levels of federal, state and local governments, particularly through networks of decision-makers (C Murray, P Frijters, 2015, Clean money in a dirty system, UQ.)

However many developers and builders with an ethical company culture and reputation stand by their work. The property developer provides entrepreneurship and leadership and takes risks that lead to significant community benefit.

In one sense, the development sector is too big to fail, contributing to economic growth, employment, and influencing property values and the political scene. The building industry is a large part of the local economy, contributing some $25 billion to the NSW economy and employing nearly 10 per cent of its labour force in 2015, according to the Lambert Report.

Mutually beneficial relationships between developers and governments have existed for much of white settlement in Australia. Governments rely on risk-takers to build needed infrastructure, and developers are supported by governments for their roles in raising Treasury revenue, providing employment and stimulating economic growth.

Perhaps the lack of interest in examining developer roles to date might be in part a recognition of the complexity and resilience of the development ecosystem, the fear of unintended consequences of reform, the lobbying power of the development sector, and the need to maintain the development sector’s support. Several failed High Court challenges to developer donation bans have made political motivations of many developers very clear.

Systems thinking suggests that at some point all systems will adapt, collapse or transform when external conditions or internal contradictions stress system behaviours. Early system signs are increasing instability of system components that indicate loss of linkages and feedbacks, flagging sudden collapse of the whole system. It is not too difficult to find indications of system collapse in this can of worms.

What we could do in NSW

  1. Bed down the NSW Building Commissioners job and resourcing with enabling legislation. Address the insurance premium threat to the construction industry. Handle unexpected outcomes and “unknown unknowns”.
  2. Work with the federal government to implement the 24 recommendations of the Shergold-Weir Report.
  3. Seek backing for a national approach to customer protections through the Building Ministers Forum and federal ministers, to address developer and builder liability, establish a national indemnity insurance scheme for the construction sector, and develop unsafe product policies for housing developments.
  4. Set up a Royal Commission to untangle the current development ecosystem and developer roles and practices, and to suggest long-term national reforms to the development sector that will address current building failures and owner losses, and produce safe, healthy, well-built and long-lasting buildings.
  5. Re-examine pre-1980 building practices to identify potential reintroduction of effective past practices that reduce risk of defects, such as the Clerk of Works role representing the client’s interests on-site, still commonly used in the EU and UK building sectors. At the same time, examine risky developer practices such as “value management” that aim to find cheaper ways to construct buildings by altering approved designs.

How might this crisis play out?

The exposure of failings of the development industry in NSW and Australia is the beginning of a long journey to reform the sector. Exposure of more building failures are expected in a large stock of recent apartment buildings. Attempts to tinker at the edges of the development ecosystem will prolong the crisis and delay recovery, and drag more investors, owners, tenants and governments into dark places.

The fallout of this crisis, at the end of the current property boom cycle, may see many developers close doors and get out of development activities. Apartment fire-sales may depress property prices generally and make housing more affordable. The crisis might trigger Parliament to set up an effective federal Independent Commission Against Corruption. A root and branch clean-out of the development industry may have long-term benefits for the economy and our community, but carry a lot of pain – unemployment, bankruptcies and foreclosures, and falling government revenue.

It may be that governments are forced into deficit to fund large capital works programs as per Australia’s recent response to the 2008 GFC and the US New Deal programs of the 1930s. C’est la vie.

Source: https://www.thefifthestate.com.au/innovation/building-construction/building-failures-and-developer-ecosystems-the-tip-of-the-iceberg/?fbclid=IwAR2eJx1bjddBGoCnMS3-6fvIjtwYEzus2agWPDXL3aXTLthSPjCyP3Gknqs

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