Tag: The Conversation

What Should New Home Buyers Expect?

Consumers have more protection when buying a new fridge, than when buying a new property – according to an article in the The Conversation.

Regulation of the Australian building industry is broken, according to the Shergold-Weir report to the Building Ministers’ Forum (BMF).

[…] we have concluded that [the] nature and extent [of problems] are significant and concerning. The problems have led to diminishing public confidence that the building and construction industry can deliver compliant, safe buildings which will perform to the expected standards over the long term.

You can say that again.

Just one of the issues identified in the report, combustible cladding, could affect over 1,000 buildings across Australia. An unknown proportion of these are tall (four storey and above) residential strata buildings. Fears of rectification costs are starting to have severe impacts on the apartment market.

The cost of replacing combustible panels at the Lacrosse Apartments in Melbourne, which caught fire in 2014, will be at least A$5.7 million, plus A$6 million or so in consequential damages. The total cost of replacing combustible panels across Australia is unknown at this point, but is likely to run to billions of dollars.

The Shergold-Weir report identifies a catalogue of other problems, including water leaks, structurally unsound roof construction and poorly constructed fire-resisting elements. Faults appear to be widespread.

A 2012 study by UNSW City Futures surveyed 1,020 strata owners across New South Wales and found 72% of respondents (85% in buildings built since 2000) knew of at least one significant defect in their complex. Fixing these problems will cost billions more.

Regulatory failures are not only “diminishing public confidence”, they have a direct impact on the hip pockets of many Australians who own a residential apartment. In short, building defects resulting from lax regulation are a multi-billion dollar disaster.

How could authorities let this happen?

A web of regulations and standards enacted by governments cover construction in Australia, but this regulation is centred on the National Construction Code (NCC). The Australian Building Codes Board (ABCB), a body controlled by the Building Ministers’ Forum, manages the NCC. The ABCB board comprises appointed representatives from the Commonwealth plus all the states and territories and a few industry groups.

It is such a complicated system that it is hard to identify any government, organisation or person that is directly responsible for its performance.

The NCC is supposed to create “benefits to society that outweigh costs” but it appears the ABCB may have been more focused on the need to “consider the competitive effects of regulation” and “not be unnecessarily restrictive”. (Introduction to the NCC Volume 1; ABCB)

The BMF’s February 8 communique, issued after the fire in the Neo200 building in Melbourne, is straight out of the Yes Minister playbook:

Ministers agreed in principle to a national ban on the unsafe use of combustible ACPs (aluminium composite panels) in new construction, subject to a cost/benefit analysis being undertaken on the proposed ban, including impacts on the supply chain, potential impacts on the building industry, any unintended consequences, and a proposed timeline for implementation. Ministers will further consider this at their next meeting [in May this year].

This suggests the ministers are more concerned about possible impacts on the panel suppliers and the building industry than the consumer. The earliest a ban can take effect is in May. In the meantime, anecdotal evidence suggests buildings are still being clad in combustible ACP.

Thanks to the journalist Michael Bleby, we know governments and the ABCB failed to act in 2010 when presented with evidence that combustible ACP was not only a danger, but was also being widely used on tall residential buildings.

Bleby quoted ABCB general manager Neil Savery as saying neither his organisation, nor any of the states, was aware that builders were using the product incorrectly.

We also know that panel manufacturers, including the Australian supplier of Alucobond, actively lobbied building ministers. At the July 2011 BMF meeting, the ACT representative effectively vetoed an ABCB proposal to issue an advisory note on the use of combustible ACP.

We are entitled to ask why the ABCB and its staff, or the downstream regulators and their staff, did not know about serious fire problems with ACP that the technical press identified as long ago as 2000. The answer will be of particular interest to residents of tall apartment buildings clad in these panels, all of whom are now living with an active threat to their safety.

Consumers are owed better protection

While both Labor and Coalition governments have worked to improve consumer protection for people buying consumer goods, their record on housing, particularly apartments, is awful. While a consumer can be reasonably sure of getting restitution if they buy a faulty fridge, no such certainty exists if they buy a faulty house or apartment.

At the moment, the NCC does not have any focus on providing protection for buyers of houses or apartments. There are few requirements for the durability of components and astonishingly weak requirements for waterproofing. Under the NCC and its attached Australian Standards, particularly AS 4654.1 and 2-2012, a waterproof membrane could last, in practice, five minutes or 50 years.

Given the magnitude of the economic loss, it would be appropriate for the BMF and ABCB board to publicly admit they have failed. Since their appointments in November 2017 and January 2013 respectively, neither ABCB chair John Fahey nor Savery as general manager has remedied the situation. The Shergold-Weir report has not been implemented and the combustible cladding issues remain unresolved. It would be reasonable for Fahey to step down and for Savery to consider his future.

The next federal government should consider what further action should be taken, particularly in relation to individuals on the BMF and within the ABCB involved in the 2010-2011 decision not to issue the proposed advisory note on the use of ACP. Since the ABCB does not publish minutes and none of its deliberations are in the public domain no one knows what actually happened or who did what.

The new board should consider moving residential apartment buildings (Class 2 buildings in the NCC classification) from Volume 2 of the NCC to Volume 1, which controls detached and semi-detached housing. Volume 1 should then have as its overriding objective the protection of consumers.

The downstream regulators should focus on requiring builders to deliver residential buildings with no serious faults and providing simple mechanisms for redress if they don’t.

Surely this is not too much to ask.

Author: Geoff Hanmer, Adjunct Lecturer in Architecture, UNSW

Australia has a new National Construction Code, but it’s still not good enough

From The Conversation.

After a three-year cycle of industry comment, review and revision, May 1 marks the adoption of a new National Construction Code (NCC). Overseen by the Australian Building Codes Board (ABCB), the code is the nation’s defining operational document of building regulatory provisions, standards and performance levels. Its mission statement is to provide the minimum necessary requirements for safety and health, amenity, accessibility and sustainability in the design, construction, performance and liveability of new buildings.

Some say the building industry is in deep crisis and broken, that even our entire building regulatory system is not fit for purpose. Consider what has happened, particularly in residential construction. We have had buildings burning, cracking, windows exploding, rooms with intolerable heat stress, rendered unfit for occupation without costly remedial action, class actions against developers, and multi-million-dollar court judgments against consultants and builders.

What have reforms to the old Building Code of Australia (BCA), now the NCC, delivered? Is the new code good enough?

Well, how do you measure performance? We should think in terms of lives saved, heat stroke minimised, costly remedial works avoided, less sleep deprivation and climate-induced respiratory issues, disability access, less bill shock for the vulnerable, and housing that is built to allow ageing in place.

Safety and amenity

Widespread use of non-compliant building materials, and specifically combustible cladding, has been foremost in the minds of regulators. Three years ago, after the Lacrosse fire in Melbourne Docklands, the ABCB amended the existing code. This crucial revision has been carried forward into the new code.

Individually, states have acted on the findings of a Senate inquiry into this area. Last October, for example, Queensland enacted the Building and other Legislation (Cladding) Amendment Regulation 2018.

Investigations into the highly publicised, structurally unsound Opal tower in Sydney found the design – namely the connections between the beams and the columns on level 10 and level 4, the two floors with significant damage — indicated “factors of safety lower than required by standards”.

Just two months ago when the new code was released in preview form, we learnt that a significant number of approved CodeMarks used to certify compliance for a range of building materials are under recall. The Australian Institute of Building Surveyors posted urgent advice: “We are in the process of making enquiries with the ABCB and Building Ministers to find out when they were made aware that these certificates were withdrawn and what the implications for members will be […] and owners of properties that have been constructed using these products.”

Fire safety concerns are driving changes in the code. The new NCC has extended the provision of fire sprinklers to lower-rise residential buildings, generally 4-8 storeys. However, non-sprinkler protection is still permitted where other fire safety measures meet the deemed minimum acceptable standard.

Comfort and health

The code includes new heating and cooling load limits. However, requirements for overall residential energy efficiency have not been increased. The 6-star minimum introduced in the 2010 NCC remains.

The code has just begun to respond to the problem of dwellings that are being constructed to comply but which perform very poorly in the peaks of summer and winter and against international minimum standards. The change in the code deals with only the very worst houses – no more than 5% of designs with the highest heating loads and 5% with the highest cooling loads.

It’s a concern that the climate files used to assess housing thermal performance use 40-year-old BOM data. Off the back of record hot and dry summers, readers in such places as Adelaide and Perth might be surprised to learn the ABCB designates their climate as “the mildest region”.

For well over a decade my colleagues and I have researched thermal performance, comfort and health and improvements by regulation. Our recent paper, based on a small sample of South Australian houses built between 2013 and 2016, demonstrated what has been discussed anecdotally in hushed voices across the industry, that a building can fail minimum standards using one particular compliance option yet pass as compliant using a different pathway.

A building that is not six stars can be built under the new code. In fact, it may have no stars!

Lamentably, there has been no national evidenced-based evaluation (let alone international comparison) of the measured effectiveness of the 6-star standard. CSIRO did carry out a limited evaluation of the older 5-star standard (dating back to 2005). An evaluation for commercial buildings is available from the ABCB website.

Accessibility and liveability

Volume 2 of the NCC covers housing and here it is business as usual, although the ABCB has released an options paper on proposals that might be part of future codes. Accessible housing is treated as a discrete project. Advocates for code changes in this area, such as the Australian Network for Universal Housing Design (ANUHD), have written to the ABCB expressing disappointment.

A Regulation Impact Assessment on the costs and benefits of applying a minimum accessibility standard to all new housing has yet to see the light of day.

These proposals or “options” talk of silver and gold levels of design (there is no third-prize bronze option for liveable housing). Codes of good practice in accessible design have for decades recommended such measures.

It’s all about performance

Some argue that deep-seated problems have developed from a code that favours innovation and cost reduction over consumer protection. There is a cloud over the industry and over some provisions – or should we say safeguards and compliance?

Safety should not be a matter of good luck or depend on an accidental selection of a particular building material or system. New buildings born of this new code are hardly likely to differ measurably from their troublesome older siblings. The anxiety for insurers, regulators and building owners continues.

The National Construction Code adopts a performance-based approach to building regulation, but don’t expect the sales consultant to know the U-value of the windows, whether the doors are hung to allow for disabled access, or if the cleat on your tie beam is to Australian standards.

Anyone can propose changes to the NCC. The form is on the website. Consultants will be hired to model costs and benefits.

Regulatory reforms introduced through the ABCB over the past 20 years have produced an estimated annual national economic benefit of A$1.1 billion. That’s a lot of money! The owners of failing residential buildings could do with some of that cash to cover losses and legal fees.

Author: Dr Timothy O’Leary, Lecturer in Construction and Property, University of Melbourne

The Game of Homes: how the vested interests lie about negative gearing

From The Conversation.

When you want to take back a multibillion-dollar giveaway to the country’s wealthiest, expect them to put up a fight.

The Labor Party’s proposal to reduce the tax advantages of being a landlord by limiting negative gearing to new homes has become the new enemy of the landlord class, who are arming themselves for policy combat.

Luckily, the modern way we fight over resources requires no weapons, nor bloodshed, but it is nevertheless a strategic Game of Homes, with subplots, twists, surprises.

Negative gearers use losses made from investments such as renting out properties to cut their taxable incomes. If they make an eventual profit by selling out of the investment, the capital gains tax rules mean only half of it is taxed.

Labor is promising to:

  • allow existing negative gearing arrangements to continue
  • restrict new negative gearing to investment income, meaning investors could subtract investment losses from investment income but not wage income
  • allow an exemption for investments in newly constructed housing, meaning those losses could still be deducted from wage income as they can at present
  • cut the capital gains tax discount from 50% to 25%, meaning three-quarters of each capital gain would be taxed instead of one half as at present
  • exempt existing investments from the change, meaning the capital gain on selling them would be only half taxed as at present whenever they were sold.

The changes would allow it to claw back more than A$30 billion over ten years, most of it from the higher earners in a position to take advantage of negative gearing.

Among the weapons being deployed against its plans are untruths. Here are some of them.

Untruth: it’ll cost us our AAA credit rating

No less an authority then the prime minister has claimed Labor’s negative gearing and capital gains tax proposal — that would recoup billions in taxes — would somehow make Australia’s public debt less manageable. It would, for some reason, make rating agencies remove the letter A from rating documents that lenders pay little attention to.

This is untrue on two fronts. First, increasing taxes by A$10 billion per year would make public debt more manageable, not less.

Second, ratings by agencies who proved to be unable to judge risk during the global financial crisis don’t matter much to borrowers. Morrison would be as well served by claiming that he has three fully grown and trained dragons that would roast the grandchildren of people who vote Labor.

How effective it is depends on how much our media has become a clickbait farm rather than a news reporting service.

Hint for journalists: it is not news when a politician repeats untruths. It is newsworthy when one tells the truth. If you have to report untruths, simply write a headline along the lines of “politician lies again”. You will better inform the public.

Untruth: mums, dads, teachers and nurses will suffer

The unspoken rule in Australia is that policy changes cannot hurt “Mums and Dads”. Add in teachers, nurses and police, and there’s an untouchable alliance.

Putting aside for one moment that the claim is misleading (the occupations most likely to negatively gear are surgeons and anaesthetists), the inconvenient truth for those claiming that mums and dads will be hurt is that is that will still be able to negatively gear (new properties) under Labor’s policy.

What’s more shocking about the claim it that rests on the assumption that the government cares about the financial well being of police officers.

It is hard to believe that a government that presided over a two-year pay freeze for the 6,500 staff of the Australian Federal Police, and who recently cut its budget, wants its officers to have more money.

To be part of the Game of Homes you apparently need not just to be a police officer, or a Mum or a Dad, but to be landlord as well.

Untruth: we won’t build more houses

In an unlikely claim, Master Builders Australia has asserted that a policy designed to channel funding into newly built housing won’t help build more houses.

It’s becomes easier to understand when you realise that the association is part of the Game of Homes. Actual builders have been leaving it, in some cases because of concern that it doesn’t represent their interests and in others because of concern that it has ties to the Coalition.

Australia’s largest developer of new homes has been quoted in the Australian Financial Review as saying

the Labor Party’s plan to limit negative gearing tax breaks to new housing would put a rocket under the business of residential developers because demand from investors would surge

Untruth: housing will be cheaper, or more expensive

Opponents of Labor’s proposal have claimed housing will be both cheaper and more expensive, as if each is a bad thing.

Sometimes, as with Treasurer Josh Frydenberg, they claim both in the same speech, in the same sentence:

Under the policy, everyone who owns a home will see it be worth less, and under that policy, everyone who rents a house will end up paying more.

At least he has pulled back somewhat from the claims made by then Prime Minister Malcolm Turnbull during the last election campaign.

Back then Labor’s plan was going to

It isn’t what the Treasury was telling the government. We now know, from documents released under the Freedom of Information Act, that it had told it

overall, the price changes are likely to be small, though the composition of ownership may shift away from domestic investors

Last year the government asked whether it could at least say the Treasury thought Labor’s plan would reduce house prices.

Treasury replied that it could not, in strikingly blunt terms:

We did not say that the proposed policies “will” reduce house prices. We said that they “could” put downward pressure on house prices in the short-term depending on what else was going on in the market at the time, but in the long-term they were unlikely to have much impact.

There is unlikely to be much impact on rents either. When Labor cut back negative gearing in the mid-1980s in the same way as it plans to now rents rose sharply in Perth and rose somewhat in Sydney. They fell in Adelaide and Brisbane and remained steady in real terms in Melbourne. The Grattan Institute sums up the likely impact this time by saying rents “won’t change much”.

Untuth: the government wants Labor to win the election

Treasurer Frydenberg has implored Labor to

listen to the critics of its policy, cut its losses and abandon the changes to negative gearing and capital gains tax

The lie here is that Frydenberg is trying to help Labor out, that he would want it to cut its “losses”. In political battles, parties generally celebrate the other side’s losses rather than steer them away from them.

As a rule, the more vested interests organise their strategic alliances and myth-making battle plans to stop your policy, the better it is. We saw it the mining super-profit tax, we saw it with gold tax (yes, until 1991 the profits made from mining gold used not to be taxed) we saw it with fringe benefits tax, we saw it with capital gains tax itself.

Stay tuned

I can’t predict what will happen next season on Australia’s Game of Homes, but there’s a chance some of the characters in this story will dramatically meet their demise, perhaps at the election.

Winter is coming.

Author: Cameron Murray, Lecturer in Economics, The University of Queensland

Australia’s sudden ultra-low economic growth ought not to have come as surprise

From The Conversation.

Australia’s big little economic lie was laid bare on Wednesday.

National accounts figures show that the Australian economy grew by just 0.2% in the last quarter of 2018. This disappointing result was below market expectations and official forecasts of 0.6%. It put annual growth for the year at just 2.3%.

But the shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter.

These are the first back-to-back quarters of negative GDP per capita growth in 13 years – since 2006.

We’re going backwards, for the first time in 13 years

The reason this is significant is that the Australian convention around what constitutes a recession is two back-to-back quarters of negative GDP growth.

Since more people in the economy mechanically increases overall GDP, you might think that measuring things on a per-person basis gives a better sense of whether we are better off or worse off.

And you would be right. Why then, do we talk so much about overall GDP?

One answer is that in a lot of advanced economies there isn’t very much population growth, so overall GDP is a good enough measure.

Population growth hides it

The more insidious answer in Australia is that, for a long time, our high population growth, fed by a high immigration rate, has masked a much less rosy picture of how we are doing. And neither side of politics has wanted to admit it.

At 1.6% a year, Australia’s population growth is roughly double the OECD average, which is perhaps why we hear politicians say things like “Australia continues to grow faster than all of the G7 nations except the United States,” as Treasurer Josh Frydenberg did this week.

The good news is that standard economic theory tells us that in the long run, immigration has very little impact on GDP per capita in either direction, unless it drives a shift in the population’s mix of skills.

But in the short term, it depresses GDP per capita because fixed capital such as buildings and machines has to be shared between more workers.

The business lobby doesn’t want us to focus on that because population provides more customers as well as more workers, allowing them to grow without growing domestic market share or exports.

Governments don’t want us to focus on it because adjusting for population growth makes GDP growth look small or, as at present, negative. Also, the tax revenue from the population growth is factored into the official budget forecasts – but the extra social spending needed isn’t always factored in.

Pro tip: watch for population growth as a fudge factor generating a return to surplus in next month’s budget.

There’s a better way of getting at the truth

That said, GDP itself – per capita or not – is not a great measure of the standard of living. That’s why in 2001, the Bureau of Statistics began also reporting real net national disposable income.

It is a measure with advantages over GDP. As the bureau points out, it takes account of changes in the prices of our exports relative to the prices of our imports – our terms of trade. If the prices of our exports were increasing much faster than the prices of our imports (as happened during the mining booms), our standard of living would climb and real net national disposable income would reflect it, where as gross domestic product would not, although it would reflect increased income from increased export volumes.

To get at living standards per person, which is what we are really interested in, the bureau also publishes real net national disposable income per capita.

The graph shows that so far the growth rate of real net national disposable income per capita hasn’t changed much, and that it has been negative for far fewer quarters than in the Coalition’s first term in office.

It bounces around with changes in the prices of imports and exports, and is generally climbing less than when export prices were really high.

A year of two halves?

The treasurer painted 2018 as a “year of two halves”.

The first half was great – the annualised GDP growth rate (what it would have been had it continued all year) was a very impressive 3.8%.

The second half was just 1%.

I’m not sure the change was that clear cut. As I wrote last September, there have been troubling signs for some time, despite the solid headline growth.

Household savings have been plummeting, real wage growth has been stagnant, housing prices have been falling in Sydney and Melbourne. Together they put significant pressure on household spending, which accounts for about 60% of GDP.

Those concerns are now mainstream. Good news on export prices has rescued tax receipts for the time being, and will probably also rescue real net national disposable income per capita.

But the fundamentals of the Australian economy are looking somewhat weak. Like the US and other advanced economies, we are living in an era of secular stagnation – a protracted period of much lower growth than we had come to expect.

And until we do something to tackle it, such as a major government investment in physical and social infrastructure, we will continue to face anaemic wage growth, shaky consumer confidence, and mediocre economic growth per person.

Author: Richard Holden, Professor of Economics, UNSW

Receiving a login code via SMS and email isn’t secure

When it comes to personal cybersecurity, you might think you’re doing alright. Maybe you’ve got multi-factor authentication setup on your phone so that you have to enter a code sent to you by SMS before you can login to your email or bank account from a new device, via The Conversation.

What you might not realise is that new scams have made authentication using a code sent by SMS messages, emails or voice calls less secure than they used to be.

Multi-factor authentication is listed in the Australian Cyber Security Centre’s Essential Eight Maturity Model as a recommended security measure for businesses to reduce their risk of cyber attack.

Last month, in an updated list, authentication via SMS messages, emails or voice calls was downgraded, indicating they’re no longer considered optimal for security.

Here’s what you should do instead.

What is multi-factor authentication?

Whenever we login to an app or device, we are usually asked for some form of identity check. This is often something we know (like a password), but it can also be something we have (like a security key or an access card) or something we are (like a fingerprint).

The last of these is often preferred because, while you can forget a password or a card, your biometric signature is always with you.

Multi-factor authentication is when more than one identity check is conducted via different channels. For instance, it’s common these days to enter your password, and an extra authentication code you need to enter is sent to your phone via SMS message, email or voice mail.

Lots of services, such as banks, already offer this feature. You’re sent a “one-time” code to your phone in order to confirm authority to enact a transaction.

This is good because:

  • it uses two separate channels
  • the code is randomly generated, so it can’t be guessed
  • the code has a limited lifetime

How could this go wrong?

Suppose a cybercriminal has stolen your phone, but you have it locked via fingerprint. If the criminal wants to compromise your bank account and attempts to login, your bank sends an authentication code to your phone.

Depending on how your phone settings are configured, the code could pop-up on your phone screen, even when it’s still locked. The criminal could then input the code and access your bank account. Note that “do not disturb” settings on your phone won’t help as the message still appears, albeit quietly. In order to avoid this problem, you need to disable message previews entirely in your phone’s settings.

A more elaborate hack involves “SIM swapping”. If a criminal has some of your identity details, they might be able to convince your phone provider that they are you and request a new SIM attached to your phone number to be sent to them. That way, anytime an authentication code is sent from one of your accounts, it will go to the hacker instead of you.

This happened to a technology journalist in the US a couple of years ago, who described the experience:

At about 9pm on Tuesday, August 22 a hacker swapped his or her own SIM card with mine, presumably by calling T-Mobile. This, in turn, shut off network services to my phone and, moments later, allowed the hacker to change most of my Gmail passwords, my Facebook password, and text on my behalf. All of the two-factor notifications went, by default, to my phone number so I received none of them and in about two minutes I was locked out of my digital life.

Then there is the question of whether you want to provide your phone number to the service you are using. Facebook has come under fire in recent days for requiring users to provide their phone number to secure their accounts, but then allowing others to search for their profile via their phone number. They have also reportedly used phone numbers to target users with ads.

This is not to say that splitting identity checks is a bad thing, it’s just that sending part of an identity check via a less-secure channel promotes a false sense of security that could be worse than using no security at all.

Multi-factor authentication is important – as long as you do it via the right channels.

Which authentication combinations are best?

Let’s consider some combinations of multi-factor authentication that have varying degrees of ease of use and security.

An obvious first choice is something you know and something you have, say a password and a physical access card. A cybercriminal has to obtain both to impersonate you. Not impossible, but difficult.

Another combination is a password and a voiceprint. A voiceprint recognition system records you speaking a particular passphrase and then matches your voice when you need to authenticate your identity. This is attractive because you can’t leave your voice at home or in the car.

But could your voice be forged? With the aid of digital software, it might be possible to take an existing recording of your voice, unpack and re-sequence it to produce the required phrase. This is somewhat challenging, but not impossible.

A third combination is a card and a voiceprint. This choice removes the need to remember a password, which could be stolen, and as long as you keep the physical token (the card or key) safe, it is very hard for someone else to impersonate you.

There are no perfect solutions yet and using the most secure version of authentication depends on it being offered by the service you are using, such as your bank.

Cyber security is about managing risk, so which combination of multi-factor authentication suits your needs depends on the balance you accept between usability and security.

Author: Mike Johnstone, Security Researcher, Associate Professor in Resilient Systems, Edith Cowan University

Lacrosse fire ruling sends shudders through building industry consultants and governments

On the last day of summer for 2019, the Victorian Civil and Administrative Tribunal (VCAT) delivered a burst of sunshine to apartment owners at the high-rise Lacrosse building in the Melbourne Docklands precinct. Lacrosse suffered a serious cladding fire on November 24 2014, started by a single cigarette on a balcony. Last Thursday, Judge Ted Woodward ordered the owners be immediately paid A$5.7 million in damages.

The judge also indicated that the owners would receive most of the balance of their A$12.7 million claim – including nearly A$6 million in calculated costs of compliance with building codes.

However, in our adversarial legal system, there are losers as well as winners. The losers in this case are the fire engineer, the certifier and the architects.

The builder, LU Simon, was ordered to pay more than A$5.7 million to apartment owners. However, the architect, fire engineer and building certifier who worked on the project would pay most of that to LU Simon after Judge Woodward found they had breached contractual obligations.

Fire engineer Thomas Nicholas was ordered to pay 39% of the damages, certifier Gardner Group 35% and architects Elenberg Fraser 25%. Incredibly, the builder, LU Simon, is a winner, assessed to pay only 3% of the damages.

So shocking is the VCAT decision to architects that the national president of the Australian Institute of Architects suggested in an email to members last Friday that they might need to seek counselling.

The decision reminds architects and other consultants that abiding by common practice is no defence if that practice is inadequate. Even though an architect may work for the builder and be employed on a limited commission during construction, they still bear primary responsibility for the safety of the building as the “lead consultant”. According to the decision, architects and consultants are required to exercise high standards of professional judgement and skill even if their commissioning arrangements and fees militate this.

So is this a win for all owners?

It looks like a cause for celebration by the owners. But is it?

Well, for a start, this decision has taken over four years to emerge. It may yet be the subject of an appeal. In the meantime, owners and residents have had to live in a building that is not safe, although work to replace the cladding should be complete by May.

Judge Woodward said the decision applies to the specific circumstances of Lacrosse only, so the owners of other buildings, including Neo200, which was evacuated on February 4 after a similar fire, might not also be in the winner’s circle.

Fourteen of the Neo200 apartments are so badly damaged that rectification works could take up to a year to complete. If Lacrosse is any indication, the Neo200 legal case might take until 2022 to conclude.

The Lacrosse case ran for 22 days, involved five QCs, five juniors and an army of instructing solicitors, paralegals and expert witnesses. There were 91 volumes of documents tendered as evidence. Legal costs almost certainly exceeded A$2 million, or more than 15% of the damages sought.

Around the country, based on state audits, I estimate around 1,000 buildings have combustible aluminium composite panels on their facades. If they all generate a court case half as complex as Lacrosse, the legal bills alone could total over A$1 billion.

Government must also answer for deregulation

Those who eased the regulatory framework in place in Australia since the late 1980s share culpability with the consultants for the fires at Lacrosse and Neo200. Until the early 1990s, Australian building codes prohibited the use of combustible elements on the facades of tall buildings. Throughout the 1990s, the then Building Code of Australia (now the National Construction Code or NCC) was relaxed to a “performance standard”, which allowed builders and consultants to believe aluminium composite panels and timber were permissible.

By 2000, despite plenty of evidence that these panels were combustible and therefore not suitable as facade material on tall buildings, the market for them continued to grow. The Australian Building Codes Board did nothing about this, encouraging a potentially fatal error.

So far, on the regulatory side, no one has actually owned up to a mistake. However, the Building Ministers’ Forum is considering the 24 recommendations of a report it commissioned from Peter Shergold and Bronwyn Weir. New South Wales’ minister for innovation and better regulation, Matt Kean, has promised to crack down on dodgy certifiers. In the light of the cladding panel fiasco, he probably should be reviewing his own remit, which is based on the premise that less regulation is better.

The NCC has a goal to encourage innovation in building by allowing alternative solutions to “deemed to satisfy” provisions. Unfortunately, in the case of the cladding panels and other “innovations”, the cost savings may be only a tiny proportion of the costs of rectifying the problems.

Penitent governments should ensure flammable cladding is replaced now, not next year and certainly not in five or six years’ time when another round of court cases are finally decided after appeal. Unless governments act to fix this mistake, one that they are substantially responsible for, someone is going to be killed in a cladding fire in Australia.

As Judith Hackitt, who headed the inquiry into the Grenfell Tower disaster, said last week, a Grenfell-like event in Australia is “entirely foreseeable”.

Author: Geoff Hanmer Adjunct Lecturer in Architecture, UNSW

Falling Home Prices And Affordability

From The Conversation.

Housing prices are falling in Sydney and Melbourne, so housing must be becoming more affordable – right?

The annual growth of house prices has been slowing consistently for more than a year in Australia’s largest cities. Prices finally started falling in the latter part of last year. The decline began much earlier in Perth and Darwin. Prices in most other cities, with the exception of Hobart, have been more stable.

Melbourne and Sydney have had sharp falls in house prices, but the declines started much earlier in Perth and Darwin. ABS, Author provided

House owners have a secret weapon

A rise in house prices is a mixed blessing. For those whose employment and savings strategies have helped them become home owners, price inflation is a good thing – the value of the house rises while the mortgage debt stays the same, or falls. For others, the savings and income targets for owning a home become ever more elusive.

So this should mean falling house prices are bad for home owners and good for aspiring home owners, right? In practice, things don’t work out quite like this, for several reasons.

Provided they are financially “liquid” (they have a job and can cope financially), home owners have a secret weapon: they don’t have to sell.

Research shows housing markets tend to operate in periods of “frenzy” alternating with periods of relative inactivity. Lots of people try to capitalise and trade up in a hot market. Once markets cool, people tend to stay where they are and wait for prices to improve.

For aspiring home owners, this is bad news. Although prices might be falling, fewer people are vacating their houses. This reduces the supply of houses on the market at lower prices.

Weaker markets make loans harder to get

House markets adjust to economic cycles, although these adjustments tend to be exaggerated and are prone to overshooting. The global financial crisis is an obvious example of an extreme correction when asset values plummeted.

The current dip in house prices in Australia is almost certainly a milder adjustment. However, even minor adjustments in the housing market are associated with adjustments elsewhere in the economy, particularly in labour markets.

The graph below shows the national trends in employment and underemployment over the past three years. Although total employment has been growing, the reported level of underemployment (a measure of the desire of workers to work more hours than they do) was also growing for much of 2018. Low wages growth and limited working hours do not help when people are already struggling to afford a house.

National trends in employment and underemployment. ABS, Author provided

The supply of finance in mortgage markets also depends on the economic cycle. Unfortunately, falling house prices and a deteriorating economic outlook tend to translate to tighter lending conditions.

So while housing prices might be falling in our biggest cities, at the same time it’s becoming harder to get a home loan. The number of first home buyer dwellings financed fell by more than 5% in the year to November 2018.

So what’s next for the housing market?

Change in the total number of properties sold is also a useful leading indicator, meaning that transactions data tend to signal a change in market conditions long before average prices begin to change. The chart below shows the year-on-year growth in transactions peaked in the third quarter of 2017.

Changes in the number of properties sold in Australia. ABS, Author provided

The growth in transactions began slowing, then became negative in the early months of 2018. These changes occurred much earlier than the plateau, then fall, in prices in late 2018.

The outlook is never certain, but it is worth noting that prices very rarely stabilise or begin growing while the transaction volume is still declining.

Like many sectors of the economy, housing markets are cyclical. But what makes the housing market different is the historical fact that periods of falling prices are much less frequent than periods of rising prices. The market will soon return to its long-run unsustainable trajectory of rising prices and declining affordability.

During the current price adjustment, housing affordability may appear to improve slightly. But low wages growth and limited working hours, coupled with lending restrictions, combine to make it just as hard for first home owners to enter the market.

Current circumstances create opportunity elsewhere in the housing system. In particular, modestly falling prices coupled with lenders issuing fewer mortgages to owner-occupiers create fertile conditions for private residential investors. Times like this tend to favour cash buyers rather than those who need to scrape together a deposit and secure a mortgage before they can buy a house.

Paradoxically, then, declining house prices are no better for housing affordability than rising prices.

Author: Chris Leishman, Professor of Housing Economics, University of Adelaide

The Problem of ‘Regulatory Capture’

From The Conversation.

Markets require regulators. As Adam Smith, the champion of the invisible hand, notes in The Wealth of Nations, when individual interests are left unregulated they work to turn competitive markets into monopolies.

But what happens when regulators meant to check individual interests fail to promote the public interest?

Consider Australia’s banking sector. The banking royal commission has found plenty of fault in the ways the corporate and prudential regulatory agencies performed their vital roles – due not to lack of power but an unwillingness to use that power.

University of Chicago economist and 1982 Nobel laureate George Stigler was the first to outline how regulators can become “captured” by the very firms and industries they are meant to be regulating, beginning with an article in 1971.

Stigler’s idea has come to be known as “regulatory capture theory”, and it causes us to confront the uncomfortable question of how to ensure regulators act in the public interest, not in the interest of the firms they regulate.

Supply and demand

Stigler thought about regulation through the lens of supply and demand. Self-interested politicians supply regulation. Firms demand it – usually because they want a competitor regulated.

His classic example concerned regulations on the weight of trucks that could travel on state roads in the United States in the 1930s. He found empirical evidence that where trucks were more of a threat to traditional train transport (like on short-haul routes where railroads were less competitive) more stringent weight limits were enacted.

Rather than the regulator being a beneficent protector of the general public interest, it had become a self-interested actor responding to political pressure from the railroad owners.

This may strike you as rather cynical, but there is a swathe of evidence that across industries and time, regulators often act more in the interests of industries than the public.

These regulations usually have a plausible rationale behind them. Consider licensing of doctors. Nobody wants a poorly trained doctor let loose on them, so some form of certification makes sense. But does the medical profession limit the number of doctors and exclude foreign-trained doctors to push up their incomes? You be the judge.

It’s easy to think of other examples: “tickets” in the construction industry, certification of train and truck drivers in mining, licensing of plumbers, and on and on.

There are lots of ways this can arise. Politicians often depend on support and campaign contributions. And there is all too often a revolving door between regulators and the regulated.

Financial regulators

This brings us to the regulation of Australia’s banks.

The corporate and prudential regulatory agencies may have been unwilling to use their power, but the the big four banks were not.

And the banks have plenty of power – financial and political. They are utterly vital to the operation of the entire economy. They are among the very largest companies in the country (so a lot of retirement savings are invested in them). And they employ a lot of people.

We should stop assuming the Australian Securities and Investments Commission and the Australia Prudential Regulatory Authority, among others, are unquestionably acting in the public interest and start asking a bunch of questions.

What are the backgrounds of the people who head up these organisations and what perspective does that lead them to bring to the job? What jobs do they get after they leave the regulator, and how might that affect their motivations while acting as regulator? What would be the social sanction imposed on them if they decided to get really tough with financial industry players?

Regulators typically aren’t bad people. But sometimes they have bad implicit incentives. And the laws they are tasked with enforcing often favour a particular group – quite frequently those being regulated.

What about the politicians who make the laws in the first place? Are they really acting for all Australians with a thoughtful and balanced perspective? Or do they represent tribal interests?

We need to close revolving doors, provide more resources to regulators and scrutinise what they do much more. Let’s not be naive about regulation.

Author: Richard Holden, Professor of Economics, UNSW

Just Replace the Cladding Now!

From The Conversation.

The fire at the Neo200 building on Spencer Street in the Melbourne CBD last week has eerie similarities to the Grenfell Tower disaster. Fortunately, instead of 72 people dead as at Grenfell, only one person was hospitalised for smoke inhalation.

Nevertheless, the building industry has responded straight from the Grenfell song sheet. Rydon, the main contractor for the Grenfell Tower cladding, said the work:

… met all required building regulations – as well as fire regulation and Health & Safety standards – and handover took place when the completion notice was issued by Royal Borough of Kensington and Chelsea building control.

Rydon chief executive Robert Bond said:

I will do all I can to assist in this investigation in order to establish what caused this tragedy.

The Neo 200 architect, Hayball, stated:

Neo 200 achieved certification and approval from the building certifier and relevant authorities at the time. We welcome the opportunity to support any investigation into the incident by authorities.

This appears to be the property sector’s version of “thoughts and prayers”. We’re very sorry, but there’s nothing we can do.

Sadly, this is far from the truth. We have known of the risk for years and the problem can be rectified.

Governments must act to ensure the cladding identified as a fire risk on hundreds of buildings is replaced. Further delay in fixing an identified threat to life is unacceptable.

Before the Grenfell and Neo200 fires, Melbourne had a cladding fire at the Lacrosse building in 2014. This led to an audit of external wall cladding on buildings by the Victorian Building Authority.

Following the Grenfell fire, states conducted further audits. In October 2018, an update by the Victorian Cladding Taskforce stated:

Our investigations found dangerous materials are widely used on buildings throughout Victoria, a finding that is consistent with inquiries carried out interstate and internationally.

We now know that hundreds of residential buildings are rated as either a moderate or high risk by the New South Wales and Victorian governments. Over 350 buildings in Melbourne alone are rated “high risk”. Neo200 was regarded as only a “moderate risk”.

Residential buildings are particularly vulnerable to the effects of a cladding fire because people can be asleep and windows are often left open. The amount of smoke generated by the recent Neo200 fire is frightening.

In the UK, the central government has given local authorities the power to replace risky cladding. We should do the same here.

Governments should take rectification out of the hands of dithering strata committees and, if necessary, carry out the necessary work directly and recover the costs from the responsible parties.

How did we get to this point?

Polyethylene-cored aluminium sandwich panels – often referred to as aluminium composite panels (ACP), PE or PU panels – were developed 50 years ago, patented in 1971 and marketed as Alucobond. When the patent expired in 1991 other manufacturers entered the market, including products marketed as Reynobond (originally Reynolds Aluminium) and Alpolic (Mitsubishi Chemicals). Now, it is estimated over 200 manufacturers around the world produce ACP panels.

By the 1990s, ACP was gaining a level of acceptance in the Australasian construction market. This was aided by the introduction of performance requirements to replace a previous blanket ban on combustible materials being used on tall building facades. The timing of the relaxation of the Building Code of Australia and the introduction of ACP panels to the Australian market by multinational companies could be a coincidence.

By the end of the 1990s, there was growing evidence that the performance-based approach to facade fire protection was not working. Combustible cored sandwich panels were implicated as contributors to serious injuries and death. A notable example was a 1993 fire in the Sun Valley food-processing factory in Hereford in which two firefighters died. In 1997, the Museum of New Zealand (Te Papa) experienced a cladding fire during construction.

The general and technical press, including architectural magazines with wide circulation, reported cladding fires in various types of materials, including ACP.

What can be done to reduce the risk?

Clearly, a facade fire has serious consequences. The bedrock of all modern fire regulations is that a fire in a tall building must be confined to a single storey. A fire spreading from one floor to the next completely undermines all the elements of protection and control that make egress routes and firefighting viable.

As we saw at Grenfell, a fire that spreads up the facade and involves nearly every storey in the building can’t be brought under control.

By 2000, there was widespread concern among fire professionals and some regulators that ACP was a bomb waiting to go off. A paper by Dr Gordon Cooke clearly outlined the risks. It makes chilling reading in the light of the Grenfell disaster.

Luckily, most tall residential buildings in Australia with combustible ACP cladding have internal sprinkler systems – unlike Grenfell. We might also be able to buy some time by banning barbecues and smoking on balconies, but it is doubtful this will be 100% effective. Another possibility is to physically secure balcony doors shut, but many owners and tenants might strongly resist this draconian measure.

These measures still will not eliminate the risk of arson highlighted by the Victorian government.

As the Neo200 fire demonstrates, even a moderate risk is still quite risky. It is extraordinary that a fire allegedly lit by a single smouldering cigarette could spread so quickly across seven floors and generate so much potentially deadly smoke.

An urgent cladding replacement program certainly has its challenges. A campaign that involves working on several hundred buildings at once in Melbourne and Sydney might overload the industry.

Nevertheless, the situation has been created by a lack of action by governments. Only decisive government action can rectify it. No more “thoughts and prayers”, enquiries or investigations; just replace the cladding now.

Author: Geoff Hanmer, Adjunct Lecturer in Architecture, UNSW

Should The World Bank Be Killed Off?

From The Conversation.

Treasurer Josh Frydenberg has offered support to Donald Trump’s pick for the World Bank Presidency.

David Malpass is currently Under Secretary of the United States Treasury with responsibility for International Affairs, and his previous experience includes being chief economist at Bear Stearns prior to their collapse.

Our Treasurers support is wrong headed.

No matter what the strengths of David Malpass, the next World Bank President should not be American.

After World War Two the victors designed many of our global institutions, including the World Bank, and the International Monetary Fund. Major global institutions were headquartered in Europe or the United States, and there was an agreement that the World Bank President would be a US citizen, while the IMF would be headed by a European.

This cosy arrangement was fine for most of the 20th century, but is at odds with our 21st century world.

Trump’s unspoken ultimatum

It has been suggested that Trump would follow his usual negotiating tactics and withdraw support from the World Bank if the next chief is not American, which is presumably why some countries including Australia are likely to support Malpass.

The search for the US nomination was headed by Steven Mnuchin and Ivanka Trump, with Invanka Trump herself mentioned as a possible nomination.

Malpass may be a better candidate than the President’s daughter, but I doubt it.

Malpass has been a critic of World Bank lending to China and at Bear Stearns he ignored warning signs of crisis in 2007.

But it’s not so much Malpass’ dubious credibility that is the problem, but the idea that the President should always be American.

The American might not be the best candidate

Important global institutions should be led by the best candidate. The views and expertise of emerging market candidates, particularly from larger economies such as China, India, Brazil, Nigeria and Indonesia should be taken more seriously.

In recent years the IMF would have been much better led by a non-European. The decision to bail out French and German banks at the expense of the Greek economy in 2012 was a poor decision made by the French head of the IMF.

The IMF rightly supported restructuring of banks and financial markets after the Asian Financial Crisis in 1997, but did not push for the same for European or US banks after 2008.

So what if Australia and other middle powers did not support Malpass’ nomination?

Better off without the World Bank?

A US withdrawal from the World Bank would probably see its demise. But so what?

The World Bank has become relatively toothless.

Last year China lent more money to emerging market economies than the World Bank.

And this is the point. China needs to be brought into the World Bank and other institutions more fully, not sidelined.

Problems with governance and other issues with China’s Belt and Road initiative would be much better handled by a multilateral agency, whether that is a properly renewed World Bank or a new institution.

Author: Mark Crosby, Professor, Monash University