Podcast: Contract con tricks and little victories

It’s very much a mixed bag in this week’s podcast, not least because what’s good news for some in property prices is, inevitably, bad news for others.

But first, we have a chat about embedded networks, what they are and how apartment buyers get tricked into paying for things that should be charged to developers.

And, with property media finally catching up – we first raised this spectre a couple of years ago – we suggest a way apartment buyers can get around these scandalous rorts.

Then Sue brings us up to speed on property prices, including what’s going up and where.  And we examine how realistic it is to want to put a freeze on rents – and have a look at the one are in Australia where rent caps are working.

Then we look at a victory for the benighted residents of the Vicinity building – the one that’s being propped up, literally, while the developer has gone into receivership and the company’s supremo has disappeared somewhere in the Middle East.

And finally, we celebrate the publication of Jimmy’s new novel – and explain why it has been published under a different name.

TRANSCRIPT IN FULL

Jimmy  00:00

It’s another bright sunny Sydney morning.

Sue  00:03

It’s fantastic, isn’t it?

Jimmy  00:04

It worries me, actually. I mean, this is a ridiculously warm winter we’re having; you think well, what’s the summer going to be like?

Sue  00:12

Probably going to be scalding hot.

Jimmy  00:14

The global boiling could be on our doorstep, but we should enjoy the day. What do we have to talk about today?

Sue  00:24

We’re talking about apartment price growth, because the latest house price data has just come out for the latest quarter; the June quarter of 2023. We’ll also be talking about some embedded networks.

Jimmy  00:37

It’s big news for some people. We’ve been ploughing that furrough for a couple of years now; to no avail, I have to say. And, we’ve heard about a win for the poor people in Vicinity, so we’ll be talking about that, too. I’m Jimmy Thomson. I write the Flat Chat column for the Australian Financial Review.

Sue  01:06

And I’m Sue Williams and I write about property for Domain.

Jimmy  01:08

And this is the Flat Chat Wrap.

[MUSIC]

Jimmy

Before we go any further, I got a complaint from somebody about last week’s podcast…

Sue  01:24

Oh, no!

Jimmy  01:30

Apparently, I had a drunken rant about people in Housing Commission, letting their flats on Airbnb.

Sue  01:41

Well, I argued about that with you as well.

Jimmy  01:43

You did.

Sue  01:44

 So somebody else was arguing too?

Jimmy  01:46

It’s quite funny, because they said “I’ve only listened to two podcasts.” They said that they’ve got that nice woman who comes on, with her lovely modulated voice, who makes perfect sense and then you are on this drunken rant, about people letting Housing Commission flats on Airbnb. He said “that’s it; I’m unfollowing.”

Sue  02:10

Oh, no! We lost somebody!

Jimmy  02:11

And I thought, well, mate, you’ve just told us you’ve only listened to two podcasts; it’s not going to destroy our social media basis. Anyway, it’s 8:30 in the morning; I am not drunk yet, so hopefully I won’t be offending anybody out there. Embedded networks… There was a big story in the Herald the other day; I’ll be writing about it in the Fin Review this weekend. What’s your understanding of embedded networks?

Sue  02:45

When new apartment developments get built, some service and goods providers strike deals with the developer to provide some things for free, like some of the infrastructure for the developer. In return, the developer says that he’ll sign up the building to a service contract.

Jimmy  03:04

Or, persuade the owners.

Sue  03:07

Yes, that’s right, because the owners have to agree, but the owners at the first AGM often have no idea…

Jimmy  03:14

Absolutely.

Sue  03:15

What all the contracts are, that they’re supposed to sign. And when they see one for sewage, they think well, of course, we need sewage. So they sign that contract, not realising that really, developers should be providing all that stuff with a building.

Jimmy  03:28

Yes. So this is the key; this is the key element. I mean, it isn’t the developers signing up to the contract, it is the owners, but the owners have all turned up at their AGM… They probably haven’t even looked at the documents. There’s nice men in shiny suits standing there (and women), saying “look, this is just standard practice; just sign it.” What they don’t realise is that the developer has done a deal with an infrastructure provider to put infrastructure in there for free, in exchange for basically diluting  the apartment buyers and this is where it gets really nasty. And this is really where the government… It’s about time they stepped in and stopped sitting on their hands, dithering about “what can we do that isn’t gonna upset too many people.” The owners take a vote at the first AGM to sign contracts… No contracts before the first AGM can survive after the first AGM, unless the owners agree to them. However, once that contract is signed, the owners are stuck with it. It’s a legal contract; it’s a binding contract. I mean, the worst example I’ve heard was a stormwater tank… You get a big complex; a lot of concrete on the ground. When it rains, that’s a lot of rain that’s got nowhere to go, so they often build a stormwater tank under the building, which will collect the rainwater and then let it flow out normally into the drainage system. I have heard from a very reliable source, that people who build these things have gone to developers and said “we’ll instal the stormwater tank for you, provided you get the owners to sign up for a maintenance contract.” The maintenance contract was for 90-years, going up 5% every year.

Sue  05:24

Oh, my god! Is that legal, to sign a contract for 90-years?

Jimmy  05:27

Yes, apparently. I mean, you can get a 90-year lease on a building.

Sue  05:31

I guess. I mean, these are all services that owners need, aren’t they?

Jimmy  05:35

Well, they’re part of the building structure.

Sue  05:37

Yes. Sometimes it’s an electricity network; sometimes it’s maybe internet.

Jimmy  05:42

Internet, electric car charging, lifts, garage gates… Anything that might require maintenance, the service or infrastructure provider will put in and do a special deal; they might even put them in for free for the developer, provided, the developer gets a maintenance contract signed. At the moment, that is the key point, because that is where the owners, if they’re smart, should be saying “we’re not doing this. We’re not having this; this is a ripoff.”

Sue  06:19

It’s a way of gouging more money out of the owners, isn’t it?

Jimmy  06:22

That’s all it is. It’s cutting costs from the developer, at the expense of the owners.

Sue  06:28

But however smart you are, you go along to your first AGM, and it is incredibly confusing and intimidating.

Jimmy  06:37

Very intimidating.

Sue  06:38

So I mean, it’s really hard for anybody to stand up; any single owner to stand up and say “no, we should not sign this contract,” when you’ve got developers putting pressure on.

Jimmy  06:49

And the strata manager.

Sue  06:51

And you might have a developer who still owns some of the units, who’s actually in the meeting and sometimes they just don’t declare that they have an interest in this, as they should.

Jimmy  07:01

And if they’ve got enough votes, then they can probably get what they want, anyway.

Sue  07:06

But they can also stand up and say “oh, no; this is perfectly normal. I’ve had other apartments,” and they don’t actually reveal that they’re from the developer.

Jimmy  07:15

We heard recently about a first AGM, where all this stuff came up. Somebody stood up and said “this building management contract is far too long and too expensive.” And the developer was saying “no, no, no. This is standard practice.” And the person saying this said “no, I actually work in the business.” I think he was something to do with evaluating costs; something like that.

Sue  07:40

A surveyor or something.

Jimmy  07:42

And he knew exactly how much these contracts were, and just basically went through all of the contracts that were an offer and said “nope, we’re not doing this.” There are two things that the government needs to do here… One is, no contracts should be signed at the first AGM. They should be signed after the owners have had a chance to create a strata committee, look at all the contracts that are offered, and then make a decision.

Sue  08:13

Maybe three months in. That makes perfect sense, because then you’ve got a strata committee, who could actually hire a lawyer or ask somebody to look through all these contracts that are being proposed for the building, to find out whether they’re fair or not. And of course, they’re going to have a strata manager and that strata manager might be a fantastic person to advise them. Or, the strata manager might not be, because the strata manager has been appointed by the developer, as well. So it’s sometimes not in the strata manager’s best interests, to go against the developer.

Jimmy  08:45

What a lot of people don’t realise is, strata managers get a lot of business from developers in the setting up of buildings. So they will advise the developers on the legalities, the bylaws and things like that. That’s a big chunk of their business. They don’t want the developer to turn around and go “oh, this strata manager is not being very helpful here. We’ll never use them again.” Or even worse, tell everybody else in the industry “don’t go with those guys, because they err on the side of the apartment owners.”

Sue  09:16

That’s right. And even if a strata manager advises the strata committee to get a lawyer to check the contracts, that’s going to be in the minutes, so the developers will be able to see that in the minutes, too.

Jimmy  09:26

So this government has got to put in protections, and we’re talking about getting a Strata Commissioner, and presumably, that Strata Commissioner would come in and make this kind of thing happen. But we’ve been talking about embedded networks for two years. The government says “oh, we’re looking at the legislation, including things like embedded networks.” What are you doing about it? It’s all very well, to sit there, looking at it. It’s like the old song by The Who ‘meet the new boss, same as the old boss.’ Maybe, we will get fooled again. But you know, embedded networks; if you are coming up to your first AGM, get a hold of somebody who actually knows how things should be, and is prepared to go into the meeting and say “this is not right and we should not be voting for this, because if you do vote for it, you’re saddling yourself with costs that shouldn’t be yours in the first place.” And even worse, they’re increased costs; they’re exaggerated costs, because the service provider is looking to make a big profit. And apparently, there are building magazines you can look at, where there’s full-page ads that say ‘developers, get this for free.’

Sue  10:44

And if that’s a 90-year contract, that’s a huge amount of money.

Jimmy  10:48

Well, that’s the other thing; the government needs to establish and probably push a court case through, where they challenge the legality. Because I would say that the legal challenge to these contracts is, there’s a form of deception at play, where the customers are not being given the full information about what they’re actually signing up for. In every other aspect of business, of trade, if you are not being told the full story about what you’re getting into, then the contracts are very dubious; on very shaky ground. That’s why we keep getting these product disclosure statements, that none of us read. And that’s the other problem…  I’m sure the government will go “alright, every contract has to have a product disclosure statement. But you can guarantee that those product disclosure statements will not say at the top ‘by the way, you really shouldn’t have to pay this at all.’ So, embedded networks… Come on State Government!  Mr. Chanthivong is the Fair Trading Minister; do something about it. We have seen your predecessors get involved in things and basically with a stroke of a pen, change the law. What is your problem? Why are you not doing anything? When we come back, we’re going to talk about the other hot topic; probably hotter than even embedded network and that is, house and unit prices. That’s after this.

[MUSIC]

Jimmy

Okay, Sue; well, I did say house and unit prices… We’re not really that interested in house prices. Apparently they are going up, or they might be going down; we don’t care.

Sue  10:52

No, they’re going up; of course they’re going up. Apartment prices… Really good news for people who own apartments; not great news for people who don’t own an apartment. We’ve had five consecutive quarters of price decline; that’s over a year-and- a-bit. This last quarter (up to the June quarter), the figures have just come out and they show that capital city unit prices have rocketed up, for the first time since late 2021. So they’ve posted the most substantial quarterly gain in two years, after those five consecutive price declines.

Jimmy  12:51

Now, this is in the face of rising interest rates.

Sue  13:10

Inflation, cost of living rises, supply problems…

Jimmy  13:42

The supply problems… I mean, given the old supply-and-demand thing, a shortage of supply would suggest that prices would be pushed up.

Sue  13:52

That’s right. But there’s also those kind of supply issues that are hampering the construction industry.

Jimmy  13:58

Oh, you mean materials?

Sue  14:01

That’s right. So we’ve had a lot of issues within the apartment industry, but now prices are rising again. I mean, they reached a trough in March this year, but since March, they’ve regained about half of the loss that they made.

Jimmy  14:22

What I heard on the radio this morning was that prices are going up, but not as quickly as they had been. Is that houses they were talking about?  I suppose it was.

Sue  14:32

That’s right. Because houses traditionally, always go up more quickly than units; units tend to follow them. So we’ve had house prices going up quite substantially and now, unit prices for the first time, are actually also going up in their slipstream, almost. They rose over the quarter in most of the cities; Sydney, Melbourne, Brisbane and Adelaide and Darwin was steady and only a couple of cities, Canberra, Perth and Hobart showed a decline, but they’ve had huge price growth, those three cities. So that’s not really surprising, but we expect those will start rising again very soon.

Jimmy  15:09

Well, I mean, the other thing we keep hearing about, is distressed sales. That’s where people, faced with cost-of-living rises anyway, plus the rises in their mortgage payments, are finding that (especially people who got in on the absolute limit of high prices, low interest rates), are now finding themselves squeezed to the point where they’re having to sell and there was a track on the TV last night, about people selling at a loss, just to get unburdened by their mortgage. Will that be a significant factor, do you think, in ‘bringing more product to the market,’ as our real estate friends like to say?

Sue  15:54

Domain did a report on distressed sales and found that they weren’t as high as they might have been imagined to be. They’re getting more and more significant, but they’re not really… I mean, they haven’t hit anything like the high that they had  during the GFC; nothing like that. But it does tend to affect apartments more, because first homebuyers tend to go for apartments, rather than houses. And people who are looking for more affordable housing options tend to go for apartments, too. So people who are going to get in trouble with their mortgages are more likely to get in trouble when they have an apartment, than maybe when they have a more expensive house and a bigger income. We might see a few more apartments back on the market. We’re coming in towards spring, so we’d see generally, a lift in stock on the market in spring. Ray White did a report the other day, to find that there’d been something like a 3.1% lift in listings nationally, which is really unusual for winter. That normally never happens. There is more stock coming on, so for anybody wanting to buy an apartment, well, they are going to be more expensive, but there will be more choice available.

Jimmy  17:04

Okay. It’s the old rollercoaster isn’t it? The swings and the roundabouts.

Sue  17:10

Yes. And I was talking to an economist the other day, about house prices and unit prices. I was saying, is it good news, or is it bad news? Basically, they were saying, in some ways, it’s good news and everybody who owns an apartment or a house, really likes the idea that prices are going up and it really rebuilds confidence in the economy. But for those who are renting, particularly at the moment, when renting is so hard and so painful, with such huge rent increases, it’s really bad news. And he came up with this fantastic expression; he said ‘where you stand, depends on where you sit.’

Jimmy  17:47

Just moving on to rentals briefly; we are right in the middle of the arm wrestle between the Greens and Labor over the Housing Investment Fund. One of the things the Greens are demanding is a rent freeze. The government is basically saying rents are a state issue and so they have limited control over that, notwithstanding the fact that every state in Australia is currently run by the Labor Party…

Sue  18:23

In Canberra, they do have a rent freeze. I think rents can only go up by a certain amount every year and that has kept rents comparatively low, compared to other capital cities. So that’s really helped out renters in Canberra.

Jimmy  18:37

They’ve pegged rents at something like CPI, or something like that. You’re right; it’s a rent-cap, rather than a freeze. Do you think that could work nationally?

Sue  18:47

I think it’s really, really difficult, because investors are just coming back into the market now. We’re a nation who relies on owning property for building growth…

Jimmy  19:02

Building wealth.

Sue  19:03

And having government dabble with that; I mean, we’ve seen the outcry, every time anybody talks about getting rid of negative gearing. You know, it’s incredibly unpopular. So it’s very hard, because the investors; they’re being squeezed by interest rate rises, as well. And suddenly, if there’s a rent freeze, they’re going to suffer a little bit. Maybe they might be leaving the market, or not entering the market, and we need investors in the market to provide more rental homes. I mean, we obviously need the government to provide more social and affordable housing; that’s probably the key really. More build to rents; a lot more of that is coming online, but it’s still only minuscule. It’s only a kind of a drop in the bucket of housing, really. So I don’t know; state rent caps, I think, can be a good idea.

Jimmy  19:54

But I think then you’ve got to ally that with the end of no-fault evictions, because what would happen is if people said “oh, my rents are going to be frozen. What I’m going to do now is get rid of the tenant who’s in there and jack the rent up. If it’s going to be stuck at a level, I want it to be stuck at a higher level.”

Sue  20:14

Absolutely; I think you’re dead-right. No-fault evictions; we’ve got to get rid of that. We’ve got to give renters much more security of tenure.

Jimmy  20:22

When we come back, we’re going to talk about a small victory, but a victory nonetheless, for the plagued Vicinity building. That’s after this.

[MUSIC]

Jimmy

Have you received any threats from Jean Nassif?

Sue  20:44

No.

Jimmy  20:45

Jean Nassif is the developer behind Toplace, who are the builders of the Vicinity building.

Sue  20:53

The developers.

Jimmy  20:55

 The developers; they weren’t the actual builders. He is overseas.

Sue  20:59

Yes, we’ve seen some touching photos of him, on a hospital bed, wired up to monitors.

Jimmy  21:04

The sheets were covering the bits of his arm where the cannula would have gone in; just a strange coincidence. He has been saying he’s going to get David Chandler, who he’s accused of being all sorts of things, that he quite fundamentally isn’t. But anyway, his (I was gonna say his victims), customers, his purchasers in the Vicinity, have had a win.

Sue  21:30

The Vicinity is one of those buildings in Canterbury, in southwest Sydney. At the moment, it’s really propped up, because they’ve discovered quite serious structural faults and it’s been propped up for a number of years now. The owners are having to pay huge sums of money for that propping and to keep the building safe. They won a little bit of money from Toplace,  but that’s all really; they’re having to pay the rest. Their strata levies are massive, and some of the owners applied for compulsory strata management and won that and then just recently, the period of strata management ran out and the owners went back to NCAT, to ask for an extension, which can be quite rare, to have more than a year or more than two years of compulsory strata management. Other owners said that they didn’t want that, so there was a big battle in NCAT and the owners who are fighting Toplace finally won and they’ve got their period of compulsory strata management extended.

Jimmy  22:33

So basically, there was a strata manager in place previously. The owners who were anxious about the state of the building, got compulsory appointment of a strata manager to take over from the committee. That strata management deal has run out and the original strata manager and the original committee came back and wanted to take back control of the building.

Sue  22:58

That’s right. So it’s a terrible, horrible battle within the building, as well. I mean, it’s hard enough, battling developers-from our own experience, we know this-but when you’ve got owners at one’s and two’s as well, it’s really, really difficult. It’s great when you’ve got a united body of owners, fighting a developer, or fighting a builder; fighting for justice. But when it’s splintered, and you’ve got lots of different interest groups, it becomes really exhausting, frustrating, and it really wears you down emotionally and mentally.

Jimmy  23:31

And these owners who wanted the original strata manager reinstated. I mean, they’re getting a lot of support from overseas investors, I believe; is that correct?

Sue  23:42

Yes, I think so. They look at the strata levies, which are massive at the moment, and are alarmed. And of course, the developer is now in administration, so they’re hoping they’re going to be preferred creditors. It may well be that they’re way down the list of creditors, as well. It’s an horrific situation. And when you’ve got overseas investors, they’re looking and they don’t believe something terrible like this could never happen in a developed country like Australia.

Jimmy  24:15

Also, they’re not getting the full picture, are they?

Sue  24:17

No, often not.

Jimmy  24:19

Especially if… I mean, it may not be the case in this case, but if somebody, let’s say, a strata manager (not necessarily the one in this case), realises that his power base is overseas investors, then it might be in his interest, not to give them the bad news.

Sue  24:35

Well, that’s right, or to put a particular spin on it. And maybe, overseas investors might have a different set of priorities to owners in a building, who live there.

Jimmy  24:39

Well, that’s whether they’re overseas investors or not. Investors have different priorities from residents.

Sue  24:52

And that’s about keeping down the cost base, keeping everything going; avoiding publicity… I mean, Vicinity has had publicity and that’s probably the only way in which they’ve managed to get the government to take them seriously.

Jimmy  25:05

I still think they should change the law so that resident owners get an extra vote, or an extra half-vote.

Sue  25:13

I agree.

Jimmy  25:14

It’s a double investment. You’re investing your money, but you’re also investing your time and energy and your lifestyle, and your your happiness; all that, in living in the building. I think you’re entitled to have a bigger say, than somebody who’s sitting in Hong Kong, or Shanghai, or Ho Chi Minh City, or London, or New York, or whatever. They are not suffering the consequences of the decisions that they are contributing to. It’s not going to happen, but it should.

Sue  25:44

Another thing for the Strata Commissioner…

Jimmy  25:46

I wonder who it will be? I know a guy… I have a horrible fear that it’s going to be somebody; one of my nemesis.

Sue  25:55

Oh, and you have so many!

Jimmy  25:56

I could just take a list of people that I don’t like, and they’d have a fine bunch of candidates there. But there is one person who’s bouncing around the stratosphere and I just keep waiting for the email that says that that person is going to be appointed.

Sue  26:15

Surely not!

Jimmy  26:16

And then I’ll start my campaign. I haven’t had a campaign for a while; I could use one to keep me interested. A big day for me today.

Sue  26:26

Yes! You’re launching your new book, aren’t you? 

Jimmy  26:28

Well, my new book is out. I’m launching it tomorrow; today it’s in the bookshops.

Sue  26:33

Excellent and remind us what the title is, Jimmy?

Jimmy  26:36

Even what the name of the author is, would be a good idea. The book is called Mole Creek. It is a crime spy novel.

Sue  26:44

For people who don’t speak Scottish, that’s ‘Mole Creek,’ like the animal.

Jimmy  26:53

Or the spy…

Sue  26:54

Or the Tasmanian town, in which it’s set.

Jimmy  26:57

Yes, and it’s by some chap called James Dunbar and the reason it’s by James Dunbar is so that people don’t look at it and go “oh my god, this will be full of stuff about apartments!”

Sue  27:11

And Dunbar is your middle name, isn’t it? It sounds very regal.

Jimmy  27:15

It is. My first two name’s, ‘James Dunbar.’ It’s in the bookshops now. Rush out now and buy several copies.

Sue  27:22

It’s an outback noir thriller; crime thriller is that right?

Jimmy  27:25

An outback noir spy thriller, partly set in Vietnam during the Vietnam War.

Sue  27:32

And partly set in Tasmania, too.

Jimmy  27:33

Partly set in Mole Creek.

Sue  27:36

And you’re off to Tasmania on the first stage of your book tour, aren’t you?

Jimmy  27:40

My first ever book tour. It’s about time I had one. This will be my 15th book, or something like that.

Sue  27:47

Good luck with this book; I think this is your biggest book yet, isn’t it?

Jimmy  27:50

It is; this a big deal. This is a game-changer. I think that’s quite enough from me, about me. Thanks again, Sue, for waking up early to do this, before I got drunk and started berating people. And, thank you all for listening.

[MUSIC]

Thanks for listening to the Flat Chat Wrap podcast. You’ll find links to the stories and other references on our website flatchat.com.au. And if you haven’t already done so, you can subscribe to this podcast completely free on Apple podcasts, Google podcasts, Spotify, or your favourite pod catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week without even trying. Thanks again. Talk to you again next week.