Hon Maurice Williamson
Minister for Building & Construction
22 December 2009

Review reinforces Government action on weathertightness

A PricewaterhouseCoopers (PwC) report released today on the size and cost of the weathertightness problem reinforces the Government’s work towards assisting affected homeowners, Building and Construction Minister Maurice Williamson said today.

“I commissioned this report because we needed to know the magnitude of the problem so we could respond appropriately,” Mr Williamson said. “The PwC report shows the damage is much larger than anyone had previously wanted to acknowledge.

“The review estimates that between 22,000 and 89,000 homes are affected. The Government accepts PwC’s consensus forecast that around 42,000 dwellings built between 1992 and 2008 could have been affected.

“The report says it is likely that only a minority of these leaky homes – around 3500 - have had repairs done to date, and around 9000 failures had now gone beyond the 10-year legal liability limit period.

“This leaves thousands of New Zealanders in a terrible position: they may not be able to borrow the money to repair their homes, or to sell them, so their single most important asset is decaying in front of their eyes.”

Based on 42,000 failures, the report estimates the total economic costs of fixing the affected homes at $11.3 billion in 2008 dollars.

“Issues can be laid at the doorstep of a lot of people and organisations, but the blame game has been played for too long – now it’s time to act. That’s why the Government is bringing together a package as a priority to help affected homeowners repair their homes and move on.”

Copies of the report : http://www.dbh.govt.nz/2009-news-index

Summary Fact Sheet of the PricewaterhouseCoopers Report into the scale and scope of Leaky Homes

The Department of Building and Housing commissioned PricewaterhouseCoopers to carry out research to re-estimate the size and cost of the weathertightness problem in New Zealand. The key findings are as follows:

Failure Rates
• The total number of affected dwellings is estimated to fall within the range of 22,000-89,000. The consensus forecast is for an estimated 42,000 failures;
• Under current policy settings and resolution mechanisms, approximately 3,500 dwellings have undergone some form of repair to date;
• It is estimated that approximately 9,000 of the failures have occurred beyond the 10 year limitation period for legal liability;
• Failure rates since 2006 appear to be much lower than in previous years, suggesting changes in the regulatory requirements and building practices have addressed the major problems identified in the past and reduced the incidence of weathertightness failures.

Failure Costs
• For the consensus forecast of 42,000 failures, the total economic cost (i.e. repair and transaction costs) of remediation of the affected dwellings is estimated as $11.3 billion (in 2008 dollars);
• These costs are estimated to be distributed, under the current policy, as follows:
o 69 % to the owner;
o 25 % to councils;
o 4 % to third parties (e.g. builders); and
o 2 % to the government (the cost of administering the WHRS etc)
• Owners carry the largest share as:
o they carry their own transaction costs;
o failures occurring after the 10-year liability limit are the owner’s responsibility;
o many failures have gone unrecognised and will, therefore, remain the owner’s responsibility;
o some owners are responsible for the building work (they are the developer) or have failed to mitigate damage when recognized (contributory negligence).

QUESTIONS AND ANSWERS

1. Why was the PricewaterhouseCooopers report prepared?

A. The Department of Building and Housing carried out a review of the approach to the weathertightness problem in 2009. The first part of the review was to identify the scope of the issue. PricewaterhouseCoopers (PwC) was contracted by the Department to carry out research, analysis and modelling to provide a re-estimate of the size and cost of the leaky homes problem. Homes are defined as both houses and apartments. This was the first comprehensive research carried out on the scale and cost of the problem.

The research had the objective of estimating:
• The number of dwellings, built between 1992 (when the Building Act 1991 came into force) and July 2008, at risk of being leaky buildings;
• The number of leaky dwellings that have been repaired to date;
• Who is bearing what costs, under current policy. Costs included: repair costs (e.g. labour, materials, professional fees), legal costs, transaction (e.g. council consent fees) and other costs.

2. What data did PwC research?

A. A mix of quantitative and qualitative data and information was used to develop the re-estimate.

Quantitative data included:
• Council building consent data: 10 Territorial Authorities collected information about individual buildings from a random sample of their building consent files from 1992 – 2008;
• Weathertight Homes Resolution Service (WHRS) claims data;
• Statistics New Zealand building population data;
• BRANZ building materials survey data;
• Weathertight Homes Tribunal adjudication decisions and Court decisions;
• Survey of WHRS claimants and other parties.

Qualitative information
A number of interviews and workshops were held with a range of experts in the building sector, including architects, building surveyors, the Registered Master Builders Federation, the Certified Builders Association, council staff and WHRS assessors. The experts were asked for their views on both the size and cost of the leaky homes problem. The qualitative information was used to test the quantitative data.

3. Which Territorial Authorities provided you with information?

A. Rodney District, North Shore City, Waitakere City, Auckland City, Manukau City, Tauranga City, Wellington City, Christchurch City, Upper Hutt City and Dunedin City all supplied samples of their building consent data. Their contributions ensured a greater availability of data than previous years.

4. How many homes are affected?

A. The PricewaterhouseCoopers report shows there is a wide range of the possible number of homes affected, from a low of 22,000 to a high of 89,000. The report estimates that it is most likely approximately 42,000 homes (called the ‘consensus forecast’) built between 1992 and 2008 have been affected. The evidence suggests that only a minority have been repaired to date.

Of the leaky homes covered by the re-estimate approximately:
• 3,500 have already been repaired;
• 9,000 are likely to be outside the 10 year limitation period for legal liability.

Using the ‘consensus forecast’, it is therefore likely up to around 30,000 dwellings have already failed, but not been repaired, or will fail in the future (within the 10 year limitation period).

5. What is the total economic cost of the leaky homes problem?

A. To remediate all of the 42,000 affected dwellings in the ‘consensus forecast’ would incur a total economic cost of an estimated $11.3 billion. Some of this cost has already been incurred in the past for dwellings that have already been repaired. But the future total economic cost of remediation is likely to be around $6.3 billion.

6. What are the other key findings in the PwC report?

A. The review confirms what we have known – that there is no single cause of the weathertightness problem. The causes include:
• Poor design – such as buildings without eaves;
• Poor workmanship, reflecting a low skill base in the sector;
• Introduction of new materials and products, without good knowledge about how to use them;
• Weak inspection processes by councils.

7. Who is currently bearing the costs of the problem?

A. The cost of the weathertightness problem is currently being borne mainly by owners: 69%. Territorial authorities are meeting approximately 25% of the cost and other parties (e.g: builders and developers) just 4% of the total cost. This is mainly because repairs on most homes are paid for solely by owners, who usually do not pursue legal remedies or obtain contributions from other liable parties.

8. Are design or architecture fees, legal fees and alternative accommodation costs included in the total $11.3 billion figure?

A. Yes, such costs are included in the figure.

9. What about the cost of repairs that have already been undertaken?

A. The total cost of the leaky homes problem includes repairs and costs which have already been undertaken and paid for.

10. Are there regional variations?

A. Yes, there are regional variations. In major metropolitan areas the single unit dwellings (houses) built are typically larger and more complex and multi-unit dwellings (apartments) that include decks, flat roofs and a lack of eaves are also more frequent in these areas. The style and fashion of dwellings with greater use of monolithic cladding and higher risk design features occur more often in the major metropolitan areas. Building practices in these metro areas are also different to the rest of the country and likely to have contributed to the higher rate of failure - around 95 per cent of eligible WHRS claims so far come from these areas.
The level of skill and supervision for some large developments in these areas may have been lower than elsewhere, particularly for multi-unit dwellings where large numbers of labour-only contractors were hired.
However, there are exceptions. In Christchurch, there is a higher proportion of brick veneer homes with low risk design trends as is more common in the South Island. On the other hand, some dwellings built in Queenstown and Wanaka are similar to those in the metro areas with many sizeable and complex single unit homes.

11. According to the report, are multi-unit or single-unit dwellings more likely to face weathertightness problems?

A. Multi-unit dwellings show a much higher risk profile according to the research and are therefore more likely to experience weathertightness problems. However, the high risk dwellings built more recently have used different building practices that provide greater capacity for drainage and drying. Therefore, the risk profile of more recently built multi-units does not equate to the same rate of failure for those built before 2005.


12. Why was the original estimate for weathertightness so inaccurate?

A. Previous estimates were based on very limited data and knowledge about the causes and effects of weathertightness failure. Since an initial analysis by PwC in 2005, the passage of time has allowed a longer claims history to emerge in the WHRS and the courts; there has been an improved performance by building assessors in the estimation of repair costs; and the inclusion of a more detailed description of likely damage in costings. In addition to this, a greater volume of other information, in the form of evidence, anecdote and opinion as to the prevalent and likely rate of nature of the weathertightness failures in New Zealand’s housing has emerged.

13. Are the figures accurate?

A. The Government is satisfied the process was robust and the data used was reliable and the best available. It is highly unlikely a different process would have come up with a significantly different result. Even so, the report acknowledges there is a high degree of uncertainty about the numbers, but whichever way you look at it, the problem is big, the exact numbers don’t make any difference to that fact.

14. What is the 10-year limit?

A. The WHRS Act gives homeowners 10 years to lodge a claim with the WHRS from the time the dwelling was built or altered. This is in line with the 10 year longstop period under the Building Act for commencing proceedings relating to building work. The PwC report concludes that the vast majority of leaky homes will show evidence of latent failure within the 10-year period.

15. Why has it taken so long for the Government to release the PwC report?

A. The Government was mindful of the impact on homeowners and worked as quickly as possible, taking account of all the information that had been collected as part of the review. The report was released as soon as was reasonably practicable in the circumstances.
16. Is the Government directly liable for any of the leaky building problems?

A. The Government has no legal liability for leaky homes.

ENDS

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