Crisis Point

We are paying a very high price for failing to regulate properly.

Listener: 20 February, 2010.

Keywords: Regulation & Taxation;

The global financial crisis is estimated to have cost the US Government US$90 billion, or about 0.6% of its annual output. The equivalent cost in New Zealand would be NZ$1.1 billion. But take a look at the cost of our leaky-home crisis: about NZ$11.5 billion, roughly 10 times as much.

Comparing the two figures is not quite right, since the American one does not include the private costs of the crisis, and the leaky-home figure does not include health and trauma costs. However, the comparison does suggest the failure to build watertight homes is an economic disaster with a magnitude comparable to the global financial crisis.

Our leaky-home problems began in 1991, with market extremists still triumphant, when the system of construction changed dramatically. Under the Building Act 1991, construction was regulated through a building code that set out performance criteria to be achieved, rather than prescribing the precise manner in which buildings were to be constructed. For instance, builders were just told that the structure must last 50 years, the cladding 15 years, and the walls and roofs must be impermeable to water.

The belief was that the old regime stifled the use of new materials, design and construction, discouraging innovation and raising building costs. It seemed a good idea at the time.

Little thought seems to have been given to answering such questions as “if the cladding falls off after 14 years, what redress does the house owner have?”

And if the solution is to go off to court, who exactly is to be sued: the local authority building inspector, the builder, the architect, the building-materials supplier, the developer, the homeowner who onsold it, or even the MPs and their advisers who ushered in the change of legislation? Many will have died, and the rest can’t possibly collectively find the $11.5 billion. (Suing the Government is not really an option. Parliament is too clever to allow it, yet many think the Government of the day has the greatest culpability, although were it to own up it would be the taxpayer who would pay – of course.)

Leaky-home syndrome appears to have arisen from two “cost-saving” innovations. The first was the use of a “monolithic cladding” that has proven to be not watertight unless used strictly according to specification. The second was the use of untreated timber without the realisation that the treatment for borer also better sealed the wood from water. Additionally, some house designers used the opportunities to cut back water-protecting features such as eaves (anyone would think we lived in a desert). A related problem was the collapse of the apprenticeship system and the operation of some unqualified builders.

While the 3500-odd homeowners and their families suffer personal disruption and financial stress, the individual cases are winding their way through the courts and other settlement procedures. Despite the Building Act 2004’s moves towards greater regulation, a widespread view is that more is needed.

It’s all a good example of Murphy’s Law. Not the “if anything can go wrong, it will” version, but aerospace engineer Edward Murphy’s original idea of designing your system on the %assumption that anything that can go wrong will go wrong. I doubt that this thought was uppermost in the minds of the Building Code designers back in the early 90s.

Of course, accident prevention cannot be all-encompassing. Murphy was trying to minimise crashes, and the easiest way to do this is to not let the aircraft take off. Similarly, the Building Code will pose some risks, but a lot of grief could have been prevented had the designers of the approach to building asked: “If things go wrong, what happens next?”

The Regulatory Responsibility Bill floating around Parliament aims to “improve parliamentary laws and regulations in New Zealand by specifying principles of responsible regulatory management”. However, from a leaky-building perspective, this legislation is likely to prove ineffective.

It would not have made a single difference to the adoption of the Building Act or Building Code, or resulted in a single additional watertight home. That is surely a test of its relevance. If it would have been useless for dealing with one of our greatest past crises, it is unlikely to be much use in preventing future ones.

Footnote: My column of March 20 footnoted that this column may have understated the magnitude of the problem. The cost range is now put at $11.3-22.8 billion. Some 7500 houses are being dealt with, but the eventual total may be nearer 110,000.

See also <a href=>“Regulating Lessons From the Leaky Home Experience”</a>