New law will make housing crisis worse

13 November 2009

A proposed law, to be debated in the Senate next week, will escalate the current housing crisis, according to the Urban Taskforce.

The Taskforces chief executive, Aaron Gadiel, said that the proposed Australian Consumer Law will create a new legal minefield for ˜off-the-plan sales contracts for new homes.


This new law will strike at the heart of Australias supply of new housing, Mr Gadiel said.


Property developers depend on the banks to finance their projects.


Right now, banks will only finance property development for new apartments and townhouses if 80 per cent or more of the homes have been sold before construction starts.


These ˜off-the-plan sales are crucial to giving the banks the security they need.


The Senate is about to quietly override the well-established laws for off-the-plan home sales.


Mr Gadiel said the Australian Consumer Law will allow courts to set aside or amend contracts if a judge decides that a contract term is unfair.


This may be a good idea for airline, fitness centres and mobile phone contracts.


None of these industries make major capital investment decisions on the strength of their contracts with individual consumers.


An airline doesnt wait until its sold 80 per cent of the seats on a flight before it buys a 747, yet thats exactly what property developers have to do when theyre building new homes.


In order to justify the enormous investment capital required to build a new apartment building, a developer must know that it can rely on the off-the-plan contracts agreed to by home-buyers.


But this new Australian Consumer Law will give the courts a wide discretion to strike down contract provisions vital to getting a project off the ground.


Mr Gadiel said that this law will increase risk of residential development, particularly when there is a risk of a fall in property prices.


Home buyers who took a punt on property prices going up will find it easier to litigate their contract and try and get out of the purchase.


This will inevitably reduce the supply of new homes further and increase the cost of those that are built.


Mr Gadiel said that a lack of bank finance has already led to a plunge in privately financed new home construction particularly for apartments and townhouses.


The governments public housing expansion program is booming, but the private sector development is suffering, he said.


The most recent Australian Bureau of Statistics figures show that the privately-financed construction of new higher density homes is 20 per cent below the 10 year average.


More information is available here.


The Urban Taskforce is a property development industry group, representing Australias most prominent property developers and equity financiers.


The construction activity made possible by property developers contributes $78 billion to the national economy each year and creates 849,000 direct jobs.



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