(Image: Getty)

Australian apartment buildings are falling down around their owners’ ears. But, as the dust settles, NSW’s building commissioner has tried to push the burden back onto buyers, comparing the process to checking online reviews for a restaurant.

“We check out restaurants, we check whether the food is good … All of that is available at the end of your fingers on social media or whatever,” building commissioner David Chandler told radio host Ray Hadley. “If you are going to spend $750,000 on an apartment, goodness gracious I would hope you are willing to do that sort of work.”

This is a virulent strain of thought. It suggests “do due diligence, don’t be lazy, or you deserve what you get”. The problem with this thought is it does not scale. You should do due diligence before you make a big purchase, but as an approach to governance? It fails, dreadfully and awfully.

The big picture

In that sense it reminds me of the advice former treasurer Joe Hockey gave for aspiring home-owners: get a better job. This is not terrible advice to give to a single individual, but the whole country can’t move to better jobs. The fact Hockey lacked the ability to see that was terrifying.

In much the same way, the whole country can attempt to do due diligence upon buying an apartment but it doesn’t remove the fundamental problem: that the stock of newly-built apartments includes far too many duds that will be dropping plaster onto the carpet and breeding mould before the first year of ownership is out.

Do not imagine that due diligence will necessarily reveal that fact ex-ante. The developers will be doing their very best to depict these same apartments as luxury stock built to the highest specifications. Millions of dollars depends on their ability to do so.

At the time of Chandler’s appointment this year, NSW Premier Gladys Berejiklian said, “We know there are national challenges affecting the industry, but this new appointment will play a key role in protecting NSW homeowners and driving critical reforms.” The quality crisis, which first hit the headlines with the evacuation of the Opal Tower in Sydney, runs deep. Mascot Towers was also evacuated and now Chandler has warned of three more apartment buildings with “significant issues”. One building was even described as “incomplete”.

“I’m not asking for consumers to become experts … I’m not trying to shirk responsibility,” Chandler said, while encouraging buyers to go for a quick tour of their apartments before settling on their off-the-plan purchases. It is not clear what proportion of the structural problems could be spotted by an amateur having a look around.

Is your apartment a lemon?

Economics has a well-established model for what happens when quality is a problem in a market. They call it the “market for lemons”. In the model, prices fall because buyers are so reluctant, and at those prices anyone selling a quality product becomes unwilling to sell. High-quality stock is removed from the market until what remains is low-quality stock.

This theoretical model was developed by George Akerlof, who won a Nobel Prize for his work on what happens in markets when there is “asymmetric information”. It’s a formal example of “market failure”.

The current market for apartments in Australia is a terrific example of asymmetric information and market failure. The builders and developers probably have a very good idea of whether they’ve built a crumbling structure; and you, the eager buyer, have no idea at all.

Akerlof shone a spotlight on the role of information in the effective functioning of competitive markets. If we don’t know what we are buying, we will always get screwed.

The fix

We have understood and fixed these sort of problems in many complex markets. This is why our economy works so well. When you buy milk you don’t need to do due diligence on Pura or Pauls or Devondale. Likewise there is no fuel commissioner telling you to do due diligence on BP and Caltex, because the rules work properly. When you fill up with petrol you are safe to assume it really is petrol coming out the nozzle.

This is the unseen infrastructure that makes our market economy tick along. It creates symmetry of information between buyer and seller. But this infrastructure has broken down when it comes to one of the most important purchases a person will make in their entire life — a home.

And make no mistake, buying a home with defects can ruin your life. The legal battles of the owners of the Elara Apartments in Canberra were protracted and gory enough to make an episode of Four Corners.

The way to solve this is with much tougher oversight. New Zealand went through this with its “leaky homes crisis”, caused by a light regulation regime in the 1990s. It led to thousands of rotting homes before the act was replaced with proper oversight again a decade later.

Described in NZ as “one of the most ghastly blights on the landscape of this nation”, and forcing billions of dollars of government funded remediation, it is a lesson we ignore at our peril.

Peter Fray

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