Improving consumer confidence in apartments rests on making information about defects available to all

Finding relevant information about potential defects of an apartment building is hard for a team of dedicated researchers, let alone for consumers. The new industry-based Multi-Party Risk Rating Tool is a start but will it be enough?

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We recently wrote an article, lack of information on apartment defects leaves whole market on shaky footings, outlining the challenges we were experiencing in our federally funded research project into the causes of defects in the Sydney apartment market.

Even with dedicated resources and a team of six leading industry partners (strata managers, defects consultants, legal advisors, owners’ representatives, financiers and insurers), getting reliable data on the extent and nature of defects in NSW apartment buildings has been difficult.

We concluded that individual buyers and owners must face even greater obstacles.

This information asymmetry between buyers and sellers can have dire consequences and, unless addressed, will lead to continued opportunities for unscrupulous developers to exploit uninformed buyers.

This in turn will contribute to an erosion of building quality to the point where, in theory at least, public confidence in the market for apartments would be critically undermined (see the work of Nobel Laureate George Akerloff on how information asymmetries between buyers and sellers can destabilise markets).

Since our article, our research has continued and we have developed further insights into the nature of the information asymmetry problem which afflicts buyers of apartments in NSW. In simple terms this problem can be divided into four main areas:

• The large range of information sources apartment buyers would need to access to get a complete picture of a building’s defects (for example, insurance data, building defects inspection reports, development application documents etc)
• The inaccessibility of this information to the average apartment buyer, who would typically only access a strata inspection report, many of which provide very little information about building defects anyway
• The inconsistent way in which defects information is presented, both within and across different data sources, which makes it difficult to compare buildings and defects
• The cost and time associated with accessing and interpreting this information. Good strata reports can cost hundreds of dollars, and legal and expert fees to interpret any available technical information can run to thousands. This means buyers with fewer resources, such as those on low incomes and first-time buyers, are disadvantaged and exposed to greater risk

It’s encouraging to see recent communications from the NSW Building Commissioner David Chandler about the critical importance of trustworthy data in underpinning the Rebuilding Confidence reform program in NSW.

The NSW government has been working to join-up existing internal data pools to provide a single view of projects in development, and the new industry-based Multi-Party Risk Rating Tool will also be a step forward.

However, it is not yet clear how much reliable data about building defects will be incorporated into these new initiatives, or how easy and affordable it will be for the public to access the information they need to make informed purchasing decisions.

These are equity issues that need to be front of mind in the reform process.

For the public to benefit, it’s important that defect information is provided in a way that’s impartial, not overly technical, and gets to the heart of what purchasers need to know about the risks defects pose and how they can be addressed.

Finally, it’s essential that in the interests of equity, everyone has access to the same information, no matter their income or background.

A number of the Building Commissioner’s initiatives should help to address this challenge, since they will impose additional data collection requirements for buildings yet to be constructed.

What about existing buildings?

The challenge will be greater for the more than half a million existing apartments in NSW, for which complete records may not exist or be easily accessible. And it’s important to think through the risks of making data public if it’s not entirely accurate or complete – especially when this might impact the value of people’s biggest personal asset.

What the Building Commissioner has clearly demonstrated, however, is that he’s not afraid of a difficult challenge.

Alongside improving the quality of the apartment buildings we build from now on, he needs to tackle the issue of information asymmetry in the NSW apartment market. If he can pull it off, both the rest of the country and many parts of the world will no doubt be watching closely.

Martin Loosemore, School of Built Environment, University of Technology Sydney, Martin.Loosemore@uts.edu.au; Laura Crommelin, City Futures Research Centre, Faculty of the Built Environment, UNSW laura.crommelin@unsw.edu.au, Hazel Easthope, City Futures Research Centre, Faculty of the Built Environment, UNSW, hazel.easthope@unsw.edu.au; Bill Randolph, City Futures Research Centre, Faculty of the Built Environment, UNSW b.randolph@unsw.edu.au

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