With new units notorious for faults and defects, a mortgage broker has questioned whether they are worth the risk for his investor and first home buyer clients.
This comes at a time when the government’s plan to build 1.2 million homes in a five-year-period heavily relies on the uptake of new units.
“There seems to be a lack of transparency and accountability when it comes to units,” said Pankaj Angrish (pictured above left), director of mortgage brokerage FinAus, based in Western Sydney.
“Given the high strata fees, restrictions with high-density buildings, and the inability to add much value to a unit combined with the other problems associated with these developments, it’s often not worth the risk.”
Ever since the catastrophes involving the Opal and Mascot Towers came to light, NSW has been the epicentre of dodgy developments across Australia.
A report released in December 2023 revealed that over half (53%) of strata buildings experienced serious defects between 2016-2022, prompting owners’ corporations to allocate an estimated $79 million for rectification efforts.
Collaboratively undertaken by Strata Community Association (SCA) NSW and the Building Commission, the 2023 survey, involving input from more than 600 strata managers, indicates a rise in serious defects compared to 2021 (39%).
The most prevalent issues found in the survey were waterproofing (42%), fire safety systems (24%), building enclosures (19%), structural issues (15%), key services such as plumbing and elevators (14%), and non-compliant cladding (8%).
While the findings indicated a decline in incidents associated with waterproofing, structural defects, and non-compliant cladding, there was an upward trend in issues related to fire safety, building enclosures, and key services.
The surge in ‘key services’ defects, covering lifts, garage doors, car stackers, air conditioning, security systems, and smart building technologies, is attributed to the inclusion of newer technologies, according to the survey.
Stephen Brell (pictured above right) president of SCA NSW, said, “Tacking building defects continues to be a formidable task and one that is time-consuming, financially burdensome and emotionally draining for all involved.
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The survey did have had some positive news, with serious defects decreasing from 34% to 27% for new buildings built after 2020.
A total of 94% of buildings also had a current annual fire safety statement issued in the past 12 months and serious defects were rectified within a year for 48% of buildings with completed resolution work.
“We are grateful that these survey results show that consumers feel empowered to report defects with the regulator receiving double the number of serious defects reported (34%) than in 2021 (15%) showing increased confidence in regulation.”
However, the sky-high costs associated with rectifying serious defects – $283,000 per building – might still discourage buyers from purchasing units, with 57% of these costs allocated to repairs, 20% to professional costs, and 15% to legal costs.
“Every time my client goes for a unit, I ask them to look at reports for last two to three years. Minute of meeting discussions and highlighted issues from tenants or owners is crucial and it tells you a lot about the state of that building,” Angrish said.
“However, an in-depth structural report any high-rise building is not the cup of tea for anyone and we know what sort of professionals are working in the trade. You ask for a report and the buyer will be lucky to get report for one year rather what they need.”
The other problem that currently exists is that Australia is in the midst of a housing crisis, with the government under pressure to deliver on its lofty promises.
The medium to high-density unit sector is increasingly becoming an important tool in delivering additional housing stock for Australia's growing population, especially as households continue to congregate in metropolitan areas, according to CoreLogic.
For first-time buyers, capital city units provide a more affordable stepping stone into the property market at a median price of $637,593, roughly 30% lower than houses.
Investors and downsizers also appreciate the low maintenance needs of units compared to houses.
However, the latest National Housing Finance and Investment Corporation (NHFIC) ‘State of the Nation's Housing’ report forecasts a national housing deficit of approximately 106,300 by 2027 (later upgraded to 175,000), with around 59% of the shortfall expected in the unit market.
Governments, at both state and federal levels, have since looked at ways to boost the housing supply.
But news keeps breaking of the old, serious problems.
In January 2024, a 900-apartment Sydney complex is at risk of collapse and the outcome of the Mascot Towers debacle potentially could leave some owners “effectively destitute” – headlines which could easily spook potential buyers.
While the solutions to the problem of defective units are complex, Angrish urged for systemic reform within the building and construction industry.
“Skill and education level requirements for surveyors, builders, and property managers are nothing but a piece of paper,” he said.
“Things are changing but we still need strong mechanism where only well-qualified professionals can enter this space. Anyone with deep pockets can start building high rise when they have no knowledge about industry,” Angrish said.
The rising cost of strata management is another headache, fuelled by owner apathy.
“[Most] never get involved,” explained Angrish, advocating for stricter accountability measures for strata managers. “Owners are just left at the mercy of those few people. Gauging how competent those committee members are is just pure luck.”
“Compensation mechanisms also need to be strengthened. Builders usually give seven to 10-year warranty for stand-alone homes while for units, you are getting serious defects after few months.”
“Until we get strict penalty and compensation structure in place, builders will not [provide] extra precautions.”
While defective units cast a shadow over the market, Angrish urges potential buyers not to shy away entirely. Instead, he recommends strategic navigation with a focus on due diligence and informed decision-making.
Financing: Banks might tighten their belts, offering financing for lower loan-to-value ratios and implementing postcode restrictions for certain units. This means higher deposits and slower progression towards the next property.
However, first-time buyers can still find units as an affordable entry point, allowing them to build equity faster and enjoy a lower initial debt burden.
Value addition: Unlike houses, modifying units is often restricted, limiting potential value growth.
“With a house, you can often add granny flat. You can add an extra ensuite. You can subdivide or build duplex if zoning changes. Historically people have seen less growth with units compared to house so that is one reason, my suggestion in most cases is to look for houses over units,” Angrish said.
But this drawback can be offset by the lower purchase price in the first place.
Overall, Angrish said units could be a great stepping stone for first-time buyers – but he urged buyers to do their due diligence.
“They’re more affordable, so you can avoid years of saving and get on with the dream of homeownership sooner,” he said. “Lower initial debt means faster repayment, leaving you with more freedom to enjoy life and pursue other goals while you work towards your ultimate dream home.”
“All buyers must read two to three years strata reports and minute of meetings to make sure they are aware of owner concerns. Get a good professional lawyer and property surveyors who’ve got experience in dealing with these properties.”
While the lure of affordability and convenience draws many towards units, particularly first-time buyers, the shadow of faulty construction looms large. Addressing the systemic issues highlighted is crucial to ensure safe and sustainable housing options for all.
Only then can units truly fulfill their potential as a valuable stepping stone or even a permanent choice in the Australian housing landscape and a solution for the current housing crisis.
