Australia's dangerous apartment rot

As union activity drains Melbourne's apartment building system of liquidity, regulations encouraging flawed claims against builders are clouding the Sydney market.

A significant part of the slump in the fortunes of Australian smaller enterprises is the crisis that is developing in the Melbourne and Sydney commercial building industries.

In Melbourne the crisis is so bad that that everyone in the building industry is scared that the people they are dealing with will fail. In Sydney the problem could become just as bad, albeit for different reasons.

Alan Kohler yesterday set out the depth of the overall smaller enterprise crisis (What crisis? This crisis, November 14).

On the surface the commercial building crisis in Melbourne is all about the unprecedented public attack being mounted on the family-owned Grollo operation. The unions appear to want to put Daniel Grollo’s Grocon out of business because he has won work on the basis that he can build much more cheaply if unions do not control the building sites. The unions want to regain control and must know the consequences. As I pointed out previously, Australia has a lot at stake in this battle (Grollo is leading the IR battle, September 5).

But the Melbourne crisis is much more serious than the public attempt to destroy Grocon and Daniel Grollo. The Melbourne outer suburban housing market held up much longer than Sydney and developed a large army of builders and sub contractors. When, two years ago, activity fell sharply a number of home builders looked at the tender prices for three, four and sometimes five storey apartments and realised that they were priced way over the cost that the home builders could do the work for. The home builders tendered and won easily. They could see big profits.

But then they discovered that buildings that are three storeys and over are built under union rules which, for example, require $135,000 a year labourers to cart hand basins to where they are required.

In the home building game the builder would do that work himself if required. These home builders found they could not build the apartments efficiently and that they had tendered far too low, so they started to go broke. And they took with them sub contractors and the domino effect spread like a cancer.

Banks became very nervous and multiplied the problem by being tough on credit. Well-funded commercial builders suddenly encountered big losses as their sub contractors collapsed, because of the collapse of the small home builders. Now everyone is looking over his or her shoulder and the system is drained of liquidity. It also highlights why Australian cities must sprawl because of these requirements that make apartments cost far more than houses on a per square basis.

In Sydney there was not the same migration of home builders into apartments. Nevertheless there has been a succession of failures that have shattered the industry. The latest is the Procorp-Holmwood group. The 'bright’ politicians in years gone by passed an act called the Fair Trading Act, which could only be dreamed up by people who don’t know what they are doing. The New South Wales Fair Trading Act requires that the executive controlling the body corporate of a block of units to be personally responsible for building problems encountered after six years.

The lawyers have cottoned onto this and so six years after an apartment block is built the most enormous number of claims are made against the builder. Many are fictitious but it does not matter – it’s all about getting cash settlement and/or protecting the backs of the body corporate executive. It means the builder is under a cloud because of the enormous claim.

What builders are being forced to do is liquidate their companies so they can’t be sued. But that affects their credit ratings.

The current New South Wales government did not create these crazy acts but under their watch the lawyers are severely damaging parts of the New South Wales building industry.

In Brisbane there is an adjudication process that works. Would be too much to expect New South Wales politicians to copy it?

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