Housing is a big conversation right now
Rents are soaring, rental vacancies are low, and people who could previously afford to own a home are no longer able to enter the market. The percentage of Australian households living in social housing has dropped as new stock has not kept up with population growth. In many areas, wait lists are over 10 years.
There are a lot of complex factors that overlap to cause this situation, but one of the key issues is that there are simply not enough homes being built. According to Housing Australia, there is a projected shortfall of 106,300 dwellings over the next 5 years.
Big bucks have been put forward by the Federal Government to support new builds, but there are major concerns about how it will be possible to catch up.
If we do manage to pick up the pace, how will this affect the quality of available properties?
Problems with new developments
If you keep up with the news, you are likely to remember Opal Tower. If not, here’s a rundown.
Opal Tower is a residential building in Sydney Olympic Park. Construction was completed in August 2018. By Christmas, over 3,000 people either living in the building or in the immediate area had been evacuated due to structural problems caused by serious building defects.
Fingers were pointed at expedited development processes, poor building materials and a lack of regulation around the qualifications of key workers.
This has had major implications, and not just for the owners and occupants of Opal Tower.
Inflation and interest rates are high, building materials are more expensive than ever. Large developments are expensive to build, and often the only way they can be funded is by selling apartments ‘off the plan’ or by attracting investors.
But after Opal Tower and other new builds with big problems, people have low confidence in the quality of new developments.
It’s risky business, and the bottom line is that people want to know what they’re buying – as a result, only 16% of people in NSW are currently buying into new projects before they are completed. This is a massive roadblock for the plan to increase housing stock.
So what is the solution?
Latent Defects Insurance (LDI) is a strict liability, statutory guarantee that protects building owners from certain types of defects over 10 years from the completion of construction. In NSW, this is also known as Decennial Liability Insurance (DLI).
This covers major and minor defects that might become obvious over time. The really clever thing about this is that insurers don’t want to cover buildings that might cost them money – as a result, they regularly inspect buildings throughout construction and act as a regulator.
Insurance company greed providing an actual benefit to consumers? This could be an excellent policy solution to a devious problem.
In NSW, the existing model for funding defect repairs is known as a strata bond. Developers pay 2% of the total build cost to Fair Trading, which is held until an inspection process is completed. This is usually within 3 years after construction is completed, after which the bond is returned to developers.
Sometimes major defects aren’t visible, and only become evident after the building has been in use for years. This is an issue if the strata bond has already been returned to the developer, and means that shonky operators can knowingly construct buildings that will look good until they get their money back but won’t stand the test of time.
According to the Australian Financial Review, defects might cost 20-30% of the total build. That’s a big gap, and often the only option is for residents to take the matter to court at their own cost.
NSW is the first state to introduce this kind of insurance into its regulatory framework, having amended legislation to allow developers to opt in to DLI instead of the strata bond scheme for ‘class 2’ builds – residential properties with more than two dwellings in the same building.
The plan is to roll this out for nursing homes, retirement villages, and free-standing homes. There is a big push to incentivise developers to choose DLI.
It’s yet to be seen if other states will follow suit.
This has the potential to be a game changer, but it’s going to take time to rebuild public confidence.
It is also important that buyers know what questions to ask – is the building covered by DLI or a strata bond?
Why should this matter to you?
1.3 million people in NSW live in strata managed properties – which is 20% of the households in NSW. Most of the people living in these households are under 40, but there are changes underway that may shift this demographic. The times are changing, and free-standing homes are on the way out.
Recently, there has been increased investment into ‘vertical retirement villages’. For the majority of us, these new developments are well out-of-budget, but who knows what the future holds. Certainly, new social housing is likely to be high density.
Further, downsizing incentives may mean more people over 55 will start to seriously consider apartment living.
Of course, this has a benefit to anyone who wishes to live in a country with enough safe and liveable homes for everyone. This is certainly something that CPSA supports.