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Defect bond not all it's cracked up to be
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15/06/2017 - 3:38 pm
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The delayed 2 percent defects bond maybe not such a good idea after all, says Lannock Finance boss Paul Morton

The NSW Government’s deferral of the 2 per cent strata defects bond, due to be implemented on July 1, gives us cause to think about whether the levy is actually such a good idea.

The intention was to make it easy for owners in new strata schemes to get defects fixed more quickly and with less pain.

For owners, it seemed like a pot of gold to solve their problems, but what does this levy really cost?

Maybe the government is realising that it takes an immense bureaucracy to make something like this work.  Someone has to work out how much money should be contributed for each development, and someone has to look after that money, and someone needs to assess the claims that come in and make sure it’s distributed fairly and without fraud.  All of this means the government needs more people for more processes.

Talk to any developer and they’ll tell you how they intend to deal with the bond – just increase the price of every unit by 2 per cent.

So who are the winners and losers?  You can be sure that the developers won’t be losers.  They may not win from this, but they certainly won’t lose.  The government wins as it gets a nice tidy pile of cash to look after – it will get an interest return from putting the funds on deposit and won’t have to pay any interest so that’s a good deal.

And if prices go up, then owners aren’t going to win.  They’ll just pay 2 per cent more.

Which raises what might be the most salient aspect of this ‘delay’ – maybe the NSW government has realised that increasing housing prices by 2 per cent is actually making houses less affordable.

Which brings us around to the banks.  Almost all apartments are purchased with a mortgage, with people usually borrowing 80 per cent of the purchase price.  With prices going up 2 per cent, that means that loans will go up by 1.6 per cent.  Who pays?  The owners.  So the banks will do well as they get an increase in their loans (which for them are assets).  Owners are going to pay the banks the interest on this increased amount which they give to the government for free so that the government can earn interest on it.

And, just to rub salt into the wound, if the 2 per cent bond paid for by owners is not drawn down in full, it is returned to the developer.

So what should be done to address the rising tide of defects?  Surely the better approach would be to fix the problem at its source – review the certification processes, rein in shonky operators and make it easier for consumers to get information about the credentials of the developer and builder.  There is a lot taken on trust when buying in a new development and millions of dollars are changing hands with inadequate assurance about the quality of the finished product.

A 2 per cent levy to pay for defects?  Not such a good idea.  The delay in implementation now gives government and consumers an opportunity to rethink the issue.

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