Hot potatoes: Non-compliance, negative gearing

The building materials product category is feeling the heat from two different directions, writes JOHN POWER.

AHJ March 2016_flipbook

Two significant issues – regulatory reform aimed at removing non-compliant cladding and walling systems from Australian constructions; and mooted Labor Party ambitions to kill off negative gearing for established properties – both affect the building materials sector in profound ways.

These two prospective reforms, the first responding chiefly to fire-based hazards, the second addressing a purportedly unjust tax break, have the potential to influence the nature and volume of building products sold via Australia’s retail hardware channels in years to come.

Let’s examine these two issues in detail, starting with non-compliant cladding and walling products.

Non-compliance

In recent years, the Australian marketplace has been inundated with poor-quality building materials for walling applications, ranging from premium materials bearing (non-mandatory) high-class quality certification from agencies like CodeMark, right through to the opposite extreme: uncertified, unrated product with bogus or inappropriate labeling, unknown supply chains, poor fire-retardant characteristics, and negligible traceability or legal accountability in the event of unsatisfactory performance. To make matters worse, a plethora of non-traditional importation channels have emerged, including a rising number of building firms importing their own materials directly from offshore manufacturers.

There is no shortage of ‘mandatory requirements’ regarding the selection criteria and use of such building materials in Australia, particularly where safety is concerned. Bodies like the ABCB (Australian Building Codes Board) oversee important performance-based regulations, with requirements clearly defined and articulated in National Construction Code and Australian Standards provisions, among others. Relevant state-based building authorities operate within these national frameworks.

BUT, in the absence of any compulsory certification schemes pertaining to the actual products used in our wider building materials market, an ‘honor system’ has developed whereby reputable builders seeking high-class products (fully compliant with relevant Australian Standards and codes) have had to base their buying decisions on the supplier’s reputation, voluntary adherence to certification schemes, and transparent quality assurance processes. On the other hand, unscrupulous builders seeking to maximise profits at the expense of safety or quality have been free to turn a blind eye to dubious product origin, inadequate product labeling, or non-credible product test ratings. This kind of activity exploits the lack of systematised policing or enforcement measures within the sector.

The problem came to very public attention a couple of years ago when the Lacrosse highrise apartment complex in Melbourne caught fire, with the external cladding subsequently found to be non-compliant with required fire ratings. Since then, an audit of 170 buildings by the Victoria Building Authority found that 50 featured non-compliant cladding; meantime, some 2,500 buildings in Sydney are believed to be clad in unfit and/or unsafe materials. At no stage have building inspection processes been up to the task of identifying all non-compliant installations, while deemed-to-satisfy provisions established on a project-by-project basis have only served to muddy already dark waters.

In response to this state of affairs, a Building Minister’s Forum was conducted recently with the aim of addressing fire-hazardous cladding materials, in particular. The upshot of the forum is that the ABCB has agreed to investigate the feasibility of a range of reforms, the most important of which is a truly independent form of third-party accreditation for cladding material products in highrise structures. Standards Australia has also reacted to safety concerns by creating a new Standard (AS 5113), which describes comprehensively the combustibility of different types of cladding materials.

So, while independent product certification remains theoretical for the time being, there is strong support for its eventual introduction, notwithstanding corporate misgivings about ‘another cost of doing business’.

Not just cladding

While the above forum considered non-compliant cladding and fire risk, it is vital to appreciate that other building materials sectors are also debating the introduction of mandatory certification schemes for certain categories of high-risk product.

Insulation Australasia, for instance, has been calling for tighter regulatory compliance of insulation products, including duct insulation, for several years, following an internal survey (May 2014) of nine randomly selected products in the local marketplace. All nine samples failed to achieve their stated performance criteria.

Insulated ductwork is fire-rated for good reason – failure to function correctly can affect the combustibility of an entire building.

Similarly, the glass and glazing industry is well aware of the issue of non-compliant product entering our market, with obvious hazards caused by installations of poor-performing safety glass, etc.

Again, self-regulation has failed to stem the tide of bulk or privately sourced products entering Australia with few checks and balances.

Safety aside, non-compliant products that do not perform to stated specifications, regardless of whether they affect safety or not, are a swindle against the consumer – another minefield altogether.

A wave of momentum, driven by both public safety and consumer protection policies, is sweeping these and other sectors in favour of mandatory product certification, and when such measures arrive, the hardware retail industry will have to be on its mettle to make sure its supply partners are offering an approved, compliant, certified product. All parties in the supply chain will bear some responsibility for
product compliance.

Negative gearing – no positives

On an entirely different note, there has been speculation in the popular press that the Labor Party supports a reappraisal of negatively geared property investments.

Little mention has been made, however, of the possible ramifications for the construction industry and its providers of building materials.

Sometimes it takes a non-economist to see the wood for the trees. Let’s take a look at negative gearing and the consequences of rolling it back.

There are three potential revenue streams for negatively geared property investments: rental income, substantial tax rebates, and capital growth. All three have contributed to the record popularity – and high values – of our current property market. The threat of removing tax refund windfalls from negatively geared property investments will make this form of investment less attractive. Less attractive investments command lower prices in a market driven by supply and demand.

When property prices fall, investors exit the stream, leading to a buyer’s market and an increase in owner-occupiers as a proportion of overall ownership.

A dump of investment properties – almost a quarter of which are untenanted in our major cities! (some 80,000 residences in Melbourne alone are said to be empty at the moment) – will suddenly release a wave of previously unavailable entry-level housing to the market. This newly available housing, combined with overall lower prices for entry-level property, will adversely affect investment in new housing, which will lead to a decline in demand for building materials.

Now, the Labor Party has flagged its intention to retain negative gearing concessions for investors in ‘new’ properties, but retention of this carrot will do nothing to overcome the sour taste of a general drop in property prices for new and old properties alike; a tax refund pales into insignificance alongside the prospect of minimal or falling capital growth.

Changes to negative gearing may be a sensible reform at a social level, promoting investment in other asset classes and businesses, but the consequences of any reform must be studied carefully before implementation – and suppliers of building materials should be aware of their vulnerability in the process.

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