The far-reaching consequences of Opal Tower

Could Australia be on the brink of a building quality crisis that causes a meltdown in apartment prices and harms the very fabric of Australian cities?

Cracking in Sydney’s four-month old Opal Tower caused the building to be evacuated and left 51 units unsafe to occupy. The specific reasons for cracking in this case are still being investigated. But, experts say, the conditions that permitted the problem apply across large parts of the industry.

On Sunday, the New South Wales Government announced a safety audit of private building certifiers and constrution sites to attempt to restore confidence in the state’s residential skyscrapers. But it could be too little, too late.

The building industry is rife with rushed jobs, shortages of skilled tradespeople, relentless cost pressure and regulations that are not being enforced. Falling house prices this year likely exacerbated the rush as developers tried to finish projects before their competitors.

The pipeline of higher-density developments is still near record highs, as the next graph shows. As these buildings are finished and occupied, we may discover the horrendous structural failures inside Opal Tower are the first of many. If so, the impact on Australian real estate could be devastating.

DEFECTIVE

Apartment defects are common in Australia — one study found 85 per cent of all newer apartments have defects, most often leaks. To some extent this is expected; houses and offices also tend to have cracks and leaks. I live in a house that moves and has cracks, and I expect the same is true of most of us.

Buildings will normally have more quality problems than something like a car. They are not precision-made inside factories. Buildings are unique, made on their own sites with their own drainage and soil conditions. They are put together by a diverse group of people, mostly working outdoors, in a range of conditions. Expecting perfection is unrealistic.

What is important is that faults are minimised and fixed swiftly. It is also crucial that incentives are designed so developers and builders know they will suffer if their work is shoddy.

“They are complex buildings, they are big, we haven’t done these things before and they’ve been built quickly because there’s a boom on. But there is a whole structural problem with the way in which we produce these buildings,” said University of NSW City Futures Research Centre director Bill Randolph.

The incentives were “split” because the developer was not holding for the long term.

“Once they’ve sold it and got out of the thing, there is no thought about what happens over the next 30, 40, 50, 60 years,” Professor Randolph said.

“In this business it is in, and out, and off.”

The second layer of the problem is the way responsibility is diffused over architects, builders, subcontractors, engineers and certifiers.

“All along the way, there are a whole range of decisions being made by people who have no interest in the whole of the project but are crucial to what might happen,” Professor Randolph said.

“I’m old enough to remember working on building sites when I was a lad. And there’d be a clerk of works who oversaw the whole thing from start to finish, who kind of patrolled and policed the site … They don’t have those things any more. The best they have is a project manager who comes down every so often in a nice suit with a laptop and a spreadsheet.”

ARE WE TALKING BUILDING COLLAPSES?

No. Australia is not likely to have the same problems as China where high rise buildings literally topple over.

Our standards may be imperfect but they are far higher than that. Structural problems don’t mean a building coming down in a pile of dust. Structural failures can make a building uninhabitable well before it gets to that, thanks to leaks, gaps, or being unable to open doors and windows.

In some cases they can be fixed without demolition. But it always takes significant expense.

LIABILITY

When buildings go bad it can be hard to find the people responsible. Apartment owners can get left with the bill.

“Some builders will say, ‘It’s nothing to do with my workmanship I just built what was specified by others,’” Australian Council of Strata Lawyers president Tim Graham said.

“(Meanwhile, architects and engineers will say) ‘Nothing wrong with my design, it is a question of faulty workmanship.’”

Where an entity can be found that is to blame they sometimes just declare bankruptcy. “Builders can disappear,” Mr Graham said.

Where they do, that may be enough to qualify an owner to lodge an insurance claim.

A worse situation can be if the builder is not bankrupt but has no assets.

“If the builder does place itself into administration or liquidation … you can make an insurance claim but what you do sometimes find is … they are $1 companies that just sort of subsist and don’t do anything,” Mr Graham said.

The legal minefield is why owners often end up paying for remediation themselves.

THE NZ EXAMPLE

If you want to see how ugly it can get when the building industry has systemic problems, you just have to look over the ditch to New Zealand.

New Zealand is dealing with a giant multi-billon dollar problem they call “leaky building syndrome”. It affects tens of thousands of homes and other buildings and it all goes back to a relaxation of building standards in the 1990s.

The price they are paying to solve the problem is far higher than the cost of building things right the first time — and that is without accounting for the health effects of humans living amid so much rot and mould.

Their crisis is not the first of its kind and it will not be the last. Similar patterns repeat all over the world.

MARKET CONSEQUENCES

The surprise about the problems at Opal Tower in Olympic Park is it was an expensive apartment tower. A two-bedroom apartment there is advertised for $930,000. Opal Tower’s structural failure is extremely bad news for the apartment market overall.

Market expectations are that top-end developments are put together with care and due diligence. If buyers can’t even trust top-end developments then the whole market for new apartments could have a problem. When buyers can’t tell which developments are high quality and which are not the only way to be safe is to stop buying new apartments altogether. That would be a big negative for apartment prices.

Even worse is if banks can’t distinguish between good quality apartments and bad. Banks make mortgage loans cheaply because they are backed by the underlying asset. The bank gets to own the home if you default and it can get its money back. This is the difference between a mortgage (interest rate 4 per cent) and a credit card (interest rate 18 per cent).

If you default on a defective apartment with structural problems the bank is stuck with something it can’t easily sell. They don’t want that. If banks stopped lending for the purchase of new high-rise apartments then the bottom would really fall out. There is no signal yet they plan to do that. But after Opal Tower’s problems you can bet they are reassessing all their lending policies.

THE BIG PICTURE

The future of our country is at stake. The cities where most of us live are changing rapidly and, Professor Randolph says, it is crucial those changes are for the best.

“All our planning strategies are about building higher-density cities and if we can’t build good quality high density housing then the idea of the compact city and urban consolidation and the battle against sprawl … is going to fall on its face,” he said.