Via the ABC comes Philip Gall, chair of the Owners Corporation Network.
I write this piece as one of the lucky apartment owners.
Lucky not because I managed to break into the apartment market, but because I survived it financially intact.
In 2008 I purchased a two-bedroom apartment in a six-level complex near a good rail service not too far from the city. The development had won environmental awards, it shared a site with local council facilities, and was almost six years old. The building inspection report produced no major issues.
What could go wrong?
Within two years we were in full pursuit of a home owner warranty insurance claim to fund about $3 million worth of defect repairs. The external render was falling off, and balconies and bathrooms were leaking into apartments. The builder and developer had evaporated, leaving the insurer as the last resort.
The claim was robustly defended by the insurance company and failure would see apartment owners liable, on average, for around $50,000 each. Fortunately, by late 2014 we had agreed on a settlement. The long, disruptive repairs process was eventually completed in late 2016 and in mid-2017 we sold out.
I can’t “name names” because of the settlement. And this is part of the problem.
All too often, legal action against a builder, developer or insurer ends with a settlement which involves a non-disclosure agreement.
Plus, what apartment owner is going to go public and undermine the value of the building they part own?
Before you buy, do this
So my advice to my kids today, and anyone who’ll listen, is this: do not buy a new apartment, especially if it is over three stories high.
Think about older, simpler, three-level walk-up options.
In most states, home warranty insurance cover is no longer required (or even available) for new apartments over three levels.
Alternatives vary by state, but in NSW, there is instead a 2 per cent bond scheme to cover defects identified in the first two years of a new building. There are also statutory warranties provided by the builder for all defects identified in the first two years, and “major” defects found within the first six years.
The situation facing many others is worse still. In addition to situations like Opal Towers where residents have seen the value of their apartments collapse, flammable cladding rectification is costing some apartment owners closer to $100,000 to repair.
My second piece of advice is to inspect the whole building, not just the apartment you’re interested in.
Worn carpets, flaky paint, water stains and cracks are tell-tale signs of poor management. Talk to residents, particularly renters who don’t have a stake in protecting the value of the building. Expert help is good but choose your help wisely.
Always inspect the strata records very carefully before committing to a purchase contract. If there is more than token resistance to this then walk away.
Those records should include all expert reports prepared for the strata scheme since its inception, including the initial defect inspection reports, all the financial data and the minutes of the required general meetings and strata committee meetings.
Reviewing this with the assistance of an experienced eye can tell you a lot about the building. Spending on preventative maintenance is good. A solid set of provisions on the capital fund to cover future repairs and asset replacements is good too.
How we got here
This mess has been with us now for many years as ever bigger apartment buildings have been pumped out to meet demand in rapidly growing cities. Quantity has trumped quality and the needs of the consumer.
The poor companies are low-cost, low-standard outfits. The good companies have to compete with this and it tends to be a race to the bottom. As one builder told me candidly, “if they buy rubbish, we will build rubbish”.
Governments appear to have been looking the other way, too. Review after review has raised issues with the regulation of the industry.
In NSW, the recommendations of the Lambert Review completed in late 2015 have been largely left on the shelf.
It took 12 months, the Opal Tower fiasco and a state election to get action in response to the Shergold and Weir Report prepared for the building ministers nationally.
Despite a set of commitments by the NSW Government to act on this before the March state election, almost 100 days have passed since without any draft legislation coming forward.
And this is far from a problem for NSW only.
A crisis of confidence will affect us all
Confidence in new apartment offerings has been shattered at the very time that builders and developers are facing a downturn. While I feel for the good companies, and I am sure there are some, the industry’s neglect of the end consumer will probably hurt them all.
The failure of apartment living to work is a disaster for the wider community too. How do we meet the housing needs of the future if people shy away from apartment living? What are the economic consequences of a collapse in the demand for new apartments?
Effective public policy initiatives, including effective consumer protection for apartment owners, are economic imperatives.
In the meantime, if you are tempted to buy a new apartment over three levels, don’t.