A quick fix for the building sector

Arowboat drifts at sea, water seeping in from a hole in its side. Its captain has engineered all kinds of ingenious bailing-out devices. A lot of work went into the devices, and they will probably get the boat safely to shore.

But if a plug in the exact size and shape of that hole is sitting in the boat, unused, you might wonder why someone didn’t just plug the hole.

Last week, the Commerce Commission released its final report into building materials, finding the market less competitive and materials more costly than they should be.

The commission identified real problems. As it put it, ‘‘it is too slow, costly and uncertain to get [new and innovative] products approved for general use’’. While there are options available for getting new and imported materials certified for use, the system just does not work very well. The hole in the regulatory boat is obvious. Councils must sign off on buildings. If a council signs off on a building and anything goes wrong, it can face enormous cost.

The risk is real. In 2018, Sapere found that in 48% of cases over the prior decade, building consenting authorities were left to pay 100% of the damages as ‘‘last man standing’’ under joint and several liability.

Suppose an architect wants to try something new, using innovative materials from overseas that are lower cost than existing Kiwi products, stronger, and more sustainable. If a council signs off on the new building, and everything goes right, the council sees none of the benefit. But if anything goes wrong, the council stands even odds of bearing 100% of the damages.

The outcome of that set of incentives is as certain as water inundating a leaky boat. Councils protect themselves against liability by minimising risk, regardless of the costs to others.

That regulatory barrier makes architects and builders less likely to specify unfamiliar materials, locking in an advantage for domestic suppliers.

The commission recommended some plausible-sounding remedies to the problem.

It wants competition included as an objective to be promoted in the regulatory system. It suggested clearer pathways for using new materials and fewer regulatory barriers to certification and appraisal. The commission also recommended information-sharing and education to help consenting authorities become more familiar with new materials.

When liability makes councils extremely averse to risk, measures that provide better information about new materials can help. They’d make a wet and leaky boat less soggy.

But why not address the liability issue directly? Is there actually any good reason that councils should face joint and several liability with builders, architects, engineers, and subcontractors?

The current liability structure serves as a very costly form of insurance for homeowners and, in a way, for central government. If anything goes wrong with a recently built house, you can sue the council for allowing it to be built. Councils protect themselves through rules ensuring our buildings are expensive and mediocre, but low risk to councils. And homeowners able to sue councils are less likely to plead for central government’s assistance.

The report noted prior Law Commission work that had recommended capping local authorities’ liabilities rather than fully exempting them from joint-and-several liability. It also noted a position statement from the Ministry of Building, Innovation and Employment (MBIE) that downplayed the problems with joint-and-several liability while emphasising the importance of joint-andseveral liability in ensuring that someone other than the homeowner bears the cost of failures.

The Commerce Commission’s own findings suggested that liability is a far bigger issue than MBIE has claimed.

But the commission presumably saw the area as politically futile, noting previous consideration of the matter and the lack of any clearly better alternatives.

But there is a rather obvious alternative – like the plug for the leaky boat.

Exempting councils from joint and several liability would encourage sharper diligence when purchasing and commissioning homes. If that kind of bare caveat emptor regime were too harsh on its own, the Government could add the kinds of building insurance or warranty requirements that are common internationally.

Liability would shift from councils to insurers or warranty guarantors who would have stronger reasons to weigh both the costs and the benefits of new materials, making them easier to use. A warranty or insurance scheme would add to the cost of a house but could pay for itself through lower building material costs and better buildings.

The commission’s recommendations will help. But the boat will still be leaking. A closer look at the most obvious plug for that hole would have been warranted.