Dodgy high-rise apartments are making developers rich but owners are forgotten

Leaking, cracking, flammable and creaking: by now, most of us are aware of defects plaguing high-rise residential apartment towers.

There is an urgent need to re-build public confidence in a sector which, through poor self-regulation, has churned out more and more homes needing costly repairs. Some are uninhabitable.

But we should also be asking about what return owners are really receiving on these apartment homes which are making property developers filthy rich.

As a licensed builder and a spectator of real estate trends, I feel the most frustrating element of the current predicament is that the bill for repairing the current stock of dodgy apartments will ultimately lie with current owners.

Many have already unwittingly delivered astronomical profits to developers, who will cash their chips and run.

These developers have made large profits through a combination of the housing bubble and a quirk in the regulatory system that treats high-rise and low rise developments differently.

Photo: Developers are leaving the bill for repairing dodgy high-rise apartments with the owners. (ABC News: Michael Barnett)

Housing boom or land grab?

The housing boom has seen the price of some residential property double between 2004 and 2018. But it is not so much a housing boom as a land grab.

The price of bricks, mortar, windows, doors, taps, and the hourly rate of tradespeople, has not doubled.

A legacy of defects

The apartment building crisis isn’t just a Sydney problem. How bad could it be in your state?

Keeping this in mind, a situation has been created where apartment owners are overpaying for a much smaller slice of land.

Apartment buyers are paying almost the same price for a three-bedroom property as those who buy a three-bedroom house, which comes with all the land beneath it.

Alongside this feature of the housing boom — which disadvantages apartment owners — is unequal legislation that excuses high-rise developers from holding home warranty insurance.

Home warranty insurance (known in Victoria as domestic building insurance) is taken out by a builder on behalf of the owners and covers the costs of rectification of defective or unfinished works in a dwelling when the builder has disappeared, died or more commonly, become insolvent.

The insurance can be called on within seven years of the completion of the build.

What this means is that if you find your new home contains defects, and you can’t call on legislated warranties because the builder has since gone under, the insurer will cover the cost to fix the defects.

How have legislation changes influenced profits?

Prior to 2002, this insurance was a mandatory feature of all domestic building contracts.

HIH Insurance Limited, a major provider of Home Warranty Insurance, was placed into administration in March 2001 and left the insurance market.

In 2002, in response to a failure from other insurers to fill the gap left by HIH, State Governments agreed to exempt builders from providing this type of insurance in buildings above three stories.

As a result, an important way of keeping high-rise builders accountable for the quality of their product was removed.

For high-rise builders, who don’t need to qualify for this insurance and also had the incentive of rising land prices, speculative apartment developments started to look like attractive investments as they didn’t need to qualify for this kind of insurance.

Photo: Opal Tower at Sydney Olympic Park was evacuated after a concrete panel cracked. (AAP: Mick Tsikas)

Take the now infamous Opal Tower.

Publicly available documents put the cost of this development at around $215 million. If all 392 apartments were sold at their advertised price of between $800,000 and $2.5 million each, the developers have potential to make a profit on this project of around $165 million dollars, or a 77 per cent return on their investment.

Or take the Prima Pearl skyscraper in Melbourne.

The builder was paid $230 million, to build 680 “designer” apartments. Labour and materials worth $338,000 was used per home and each sold for an average cost of $1,000,000.

Quite the tidy profit for its developer. Shame about the creaking.

Photo: The Prima Pearl apartment tower delivered big profits to its developer. (774 ABC Melbourne: Simon Leo Brown)

Compare these numbers to a single-dwelling house and land package.

Good luck to the house and land developer who attempts to sell a package for $1.5 million when the same buyer could go down the road and buy the block for $550,000 and pay a better-regulated builder $450,000 to build a house on it.

Put another way, when you buy a house and land package for $1 million, you can reliably assume you are gaining $550,000 worth of land (whether it’s worth that much may be cause for a different debate) and $450,000 worth of bricks, mortar, windows, doors and the labour to put it all together.

This includes the profit both the builder and developer gained for supplying you with somewhere to live.

The same $1 million spent in Opal Tower buys you only around $122,000 of land attached to your $450,000 worth of concrete, steel, windows, taps and a tiny share of an elevator and pool (and includes the builder’s profit). The other $428,000? Well that is going straight to your developer’s pocket as profit.

And what about rising house prices?

In a rising house market the million-dollar property owner benefits from a capital gain attached, predominantly, to their $550,000 parcel of land.

Once the supply of apartments reaches saturation and capital gains are once more reliant solely on the value of land, the apartment owner will not realise vast returns.
Australia’s house of cards

Australia’s housing downturn appears to be over … for now. But huge household debts leave the nation vulnerable to a shock.

Any further costs to rectify their building will need to come from their savings, or more debt, or will force them into bankruptcy.

If their class action against the NSW government succeeds then the owners of Opal Tower apartments may yet get dealt a reprieve.
Other apartment owners across the eastern seaboard will have very limited redress — or none at all — if their statutory warranties have expired.

Is it too much to hope that tax was paid on some of the large profits made by developers over the years?

Unfortunately, it feels like another example of where profits are for the few, but losses are borne by many.

Market failure doesn’t really capture it.

Catherine Williams holds a builder’s licence, degrees in Civil Engineering and Law and is a dispute resolution consultant in the construction industry.

Article By Catherine Williams – ABC News – Source Link