Sydney and Melbourne’s real estate boom, falling standards in oversight and a reticence to report flaws have combined to create a defects crisis in the cities’ residential apartments. By Debra Jopson.

The rise of building defects

NSW Premier Gladys Berejiklian.
NSW Premier Gladys Berejiklian.
Credit: AAP Image / Bianca De Marchi

For the past 20 years, Sydney solicitor Stephen Goddard anticipated a deadly catastrophe in one of the thousands of residential skyscrapers going up across his city, as developers and investors reached higher and higher in their quest for real estate gold.

“I always thought the threat to life safety would come in the form of a building turning into a vertical barbecue,” says Goddard, who headed up the Owners Corporation Network, an organisation representing 70,000 lot owners in New South Wales strata schemes. He made himself unpopular with his own constituency by warning the sky would fall in, but he knew that shoddy fire protection abounded in many apartment blocks.

It was in fact cracking, not flames, that forced residents in Sydney Olympic Park to leave Opal Tower last Christmas Eve and Mascot Towers last month. Then this week, The Sydney Morning Herald revealed that residents had abandoned another building in inner-city Zetland eight months ago over water and fire safety defects.

NSW Premier Gladys Berejiklian admitted that self-regulation in the building industry had failed and a legislative fix was on the way, and journalists scoured the city for further cases. But frightened of the impact on their properties’ values in a stalled market, further victims have been hard to find.

“Successive owners’ corporations wanted to keep [hidden] their building defects that were not covered by a statutory warranty and for which they had no access to insurance,” says Goddard. “They wanted to fix it all quietly, without anybody noticing, and thereby flicking it and making a profit.”

Now that the two-decade-long development and real estate binge fed by steady capital growth in the major city markets is over, though, this fix-and-flick option is gone, and the extent of the defects crisis is slowly emerging.

In the high-density urban growth areas of Sydney, Melbourne, Brisbane and Perth, Goddard believes, the decade-long thrust upward that has transformed skylines has inevitably spawned faulty buildings subject to water penetration, or fire, collapse or cracking, through a variety of defects.

Tackling the flammable cladding crisis, Victorian Premier Daniel Andrews recently expressed concerns for owners who have “stranded assets”, while NSW and Queensland have also been spurred to ascertain the extent of the problem.

But Sydney will likely prove to be the defects capital, following its massive real estate boom, which eclipsed all other Australian cities.

Goddard argues that as the housing bubble grew, governments and local councils became addicted to the “sugar hit” of stamp duty and increased rates, respectively. Many consumer protections, such as home warranty insurance for buildings over three storeys, were ditched or diluted. “The only voices governments have been hearing since the beginning of this century are the voices of developers,” he says.

The bow-tied lawyer, something of a media ham, is pleased there is now a NSW parliamentary inquiry into building defects, a state government pledge to legislate for change soon and a university study of 600 high-rise buildings for defects.

Dr Laura Crommelin, one of the key researchers conducting that study at the University of NSW City Futures Research Centre, says in Sydney, in particular, the apparent epidemic of defects is about more than the rush to get buildings up fast.

Governments have encouraged skyward growth, she says, and “we’ve very much embraced this high-density development model without necessarily having both a workforce and the regulatory system in place that’s equipped to manage it properly.

“We’ve transitioned pretty fast from a situation where the majority of stuff we’re building is suburban houses to a situation where a majority of what we’re building is high-density,” says Crommelin. High-rise blocks are much more complex to build, leaving more room for error.

In one survey, City Futures researchers found that 72 per cent of owners knew of one or more defects in their high-rise buildings, which rose to 85 per cent in blocks built since 2000.

The NSW Greens discovered earlier this year, through freedom of information, that Sydney City Council had identified 341 properties in its area with flammable cladding concerns.

“If any one of these properties should have a tragic fire, who’s liable?” asks NSW Greens MP David Shoebridge.

When defects have become public, they have produced spectacles – with vision of residents struggling out of their homes, laden with personal effects and small children, a fridge being wheeled out and people pining for trapped pets. One furrowed-brow TV reporter asked a couple about their “fur child”. There are now stock images of eerily empty apartments, riven with cracks or dripping water, to accompany every story.

University of Technology Sydney sociologist Alan Morris sees these personal tragedies as the upshot of a dire confluence of circumstance. While the world’s rich funnel their wealth into our real estate, governments neglect social housing.

Professor Morris views the “hyper-commodification” of the market – where housing is seen not as shelter but as “an easy route to riches” – as a main reason prices rose so spectacularly, with an accompanying construction frenzy.

“A tax regime favouring investors, a rise in foreign investment, very low interest rates and easy access to credit, these create a perfect storm,” he says. “What you had in Sydney, and to a lesser extent in Melbourne, is a craziness where housing became seen as a crucial means of accumulation.”

Meanwhile, real estate markets have become more international as the world’s rich sought “global city” properties as an alternative to gold and shares. Here, locals with means scrabbled to take advantage of negative gearing and Chinese money became king in the upper realms.

“Very wealthy households are constantly looking for outlets for their money and Sydney was seen as a very safe haven,” says Morris, who has recently seen a retreat in investment as the Chinese government clamps down on money outflows.

The increased housing supply hasn’t helped those on low incomes. According to the Australian Housing and Urban Research Institute, the vast majority of new buildings have been in the mid-to-high price range.

Shoebridge, who is chairing the new parliamentary inquiry into the regulation of building standards, says the proliferation of defects is the outcome of “a pretty toxic mix of capital, deregulation and opportunism”.

In 2011, the NSW Coalition took office pledging to dump Labor’s planning system, which heavily favoured developers. But Shoebridge claims it did the opposite and developers now have more avenues to get what they want.

“There are so many different ways that developers have to get their desired outcome. Anything’s approvable with the right lawyer,” he says.

Meanwhile, many projects have been built using $2 companies that are extinguished at project’s end, leaving disgruntled consumers with no existing corporate entity to claim against – and weakened home building insurance.

“The pressure on home warranty insurance has been so extreme, pretty much every private insurer has left the market and it’s now just managed by a rump state government scheme called icare,” says Shoebridge.

The Home Building Compensation Fund, run by icare, had losses of $105 million in 2016-17 and $135.9 million in 2017-18, when the NSW government kicked in $181 million to keep it afloat.

“It’s a direct subsidy to the building industry and it’s being paid for at the moment by this rising liability on the state government’s financial books,” says Shoebridge.

In its survey of 600 buildings, City Futures will investigate flaws in the “buyer beware” system, given it is currently impossible for consumers to know about building defects before they purchase.

Owners now resort to costly, stressful court action, which can still leave them out of pocket, even with a win, Crommelin maintains.

The researchers’ interim report is due at the end of the year. The Shoebridge inquiry has a July 28 submission deadline and three meetings scheduled for next month. In concert, they are bound to produce another deluge of building defect stories – and more victims may come forward.

“The quantum of people being hurt you cannot imagine. It is easy to see the people who were hurt at Opal and Mascot. But there are all of those people in hiding, who have lived on construction sites whilst their apartment is gutted and refitted. They live within it because there’s nowhere else to go,” says Goddard. “That is a very large, unidentified, faceless section of the community.”

The NSW government promised “tough new laws” in February to improve construction oversight, with a building commissioner as watchdog. Goddard has been told the commissioner could be appointed within a month.

This week, Zetland forced Premier Berejiklian to reiterate that her government would act. But it is likely the post-rush hangover will worsen.

The fix may be much more costly than the NSW government currently envisages.

“The government has benefited from huge income as a result of the property boom. Helping to manage some of the costs that are also part of that same boom and the outcomes of that is part of what we have government for,” says Crommelin.

“I think that providing people with safe, healthy homes to live in that don’t send them broke because of the costs associated with fixing them, that’s a pretty important thing for government to be responsible for.” 

This article was first published in the print edition of The Saturday Paper on July 13, 2019 as "Faulty towers".

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Debra Jopson is a Sydney-based investigative reporter.

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