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Who should pay when your apartment block ‘moves in a downward motion’?

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Who should pay when your apartment block ‘moves in a downward motion’?

The recent, and well reported, examples of shoddy construction practices on high rise buildings have led some experts to warn that this is just the tip of the iceberg. The question for society is: who is responsible, and who should pay the costs of rectification?

Yesterday, I encountered one of the more skilfully articulated synonyms I have seen in a while. I am talking about the words used by engineers to describe the situation at Mascot Towers in Sydney where the residents of the 132 units have been forced to stay elsewhere since June 14, after cracks started appearing in both the primary support structure and the facade. In an update to owners, the engineers stated that “It appears that the building is moving in a downward motion” which very much sounds to me like an alternative wording of the building is sinking into the ground”!

This comes only a few months after the issues with Opal Tower where a large number of apartments were evacuated around Christmas last year and many owners are still not able to return.

There are quite a few experts warning this is just the tip of the iceberg and that many more examples of shoddy construction will emerge as a result of the high rise construction boom in Sydney and Melbourne during the last decade.

Together, with the recently released findings of flammable cladding, which estimate that there are around 1000 buildings affected with a potential repair bill that could stretch into several billions of dollars, this raises an interesting question.

Who should pay?

Reading media, there are quite a few schools of thought:

  1. The owners of the affected buildings should be responsible for the repairs and would have to seek redress from the developer/builder who produced a faulty product.

This is probably what sounds natural to most people as, after all, “buyer beware” and warranties are very well established concepts.

The problem is though that in many cases, the builders/developers of the affected buildings are no longer around and even if they are, it seems to be standard practice in the building industry to ring-fence potential liability by creating limited liability companies for each project, meaning that it will be very hard for owners to successfully seek redress from them.

There is also the issue that the NSW government in August 2018 legislated that the statutory limitations for major defects is six years. This means that if the building is older than 2013, there is no legal way at all for the owners to seek compensation from the developers – no matter if there are clear structural defects.

  1. There are some politicians that believe the government should pay for rectifying the issues and then try to seek redress from the people responsible. (Note, paywall may apply)

The same issue as described above in regard to the difficulties seeking redress from developers/builders applies here. This is therefore in effect proposing is to socialise the losses for apartment owners amongst all tax payers.

  1. Then there are those that argue that the government should foot at least part of the bill because they were aware of the problem and did nothing about it, leaving it at least partly responsible.

It is quite clear to me there has indeed been a failure of government to at least enforce existing legislation. But it is also interesting to note that the people promoting this view are generally involved in the building and construction industry and may not be completely impartial.

It is still not clear which way this massive debacle will turn out and who will ultimately foot the bill.

My guess (without saying that this is my personal preference!) is that governments will eventually cave for political reasons and provide quite substantial assistance to the people affected. As long as this assistance comes in the form of a loan that has to be eventually repaid, I can see this makes sense given the government can fund itself much cheaper than individual people. But if the assistance comes in the form of grants and bailouts, it undermines the system of individual responsibility and choice and would be a very undesirable outcome.

What is clear is the issue with substandard construction will have a very long lasting impact on the economy in general, as these events come at a precarious time for the property market overall.

INVEST WITH MONTGOMERY

Andreas is the joint Portfolio Manager of The Montgomery Fund. Andreas joined from Navigo Partners, a M&A advisory firm in Stockholm, Sweden where he was a Director responsible for origination and execution of Scandinavian projects. Before this, he worked for three years in corporate strategy at Alinta Energy in Sydney.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

  1. andrew ronan
    :

    So it’s “what ever it takes” to save the capital city property market ponzi.
    If your $1000000 unit breaks, we’ll fix it, if it’s value drops, we’ll bail it.(ZIRP)
    And if you live outside the city limits, and do not participate in supporting the ponzi, sorry guys you live in the real world.
    No soup for you.

  2. Love those engineers.
    Building are not the only things to be going in a “downwards motion” in the near future.

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