Cathy Sherry On Strata, Levies And Who Profits From Your Building

In this episode, we dive into an emerging fault line in Australia's urban future. As we build more apartments to solve the housing crisis, do we have a management system that's fit for purpose? And are we also locking ourselves out of the clean energy revolution in the process?

To unpack our strata law, energy policy and urban design collage, we're joined by Professor Cathy Sherry from Macquarie Law School, one of the world's leading authorities on the governance of multi-owned properties.

Cathy's latest research explores how distributed energy resources are reshaping the meaning of property rights and what happens when private law, not public policy, decides who receives the rewards of renewable energy. Welcome to the elephant in the room.

This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent and buyer's agent mentor, co-host of Foxtel's Location, Location, Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Our guest today is Cathy Sherry from Macquarie Law School and one of the world's leading authorities on strata and collective land ownership. Cathy has advised governments across the UK, Asia and the Pacific and literally wrote the book on strata law. She brings a legal and social lens to the way we live.

design and regulate these spaces in high density housing. If you follow her on LinkedIn, you'll notice that she doesn't shy away from the hard stuff and she's someone I personally wanted to come onto the podcast for a long time. She's finally accepted the invite. So thank you very much, Cathy.

It's great to meet you and we really appreciate your time today.

That's a pleasure. Kathy, thanks so much for coming on. I mean, as we shift away from the quarter acre block and the houses in the suburb to more high density and sort of strata living as a society, I mean, are we building it on sort of a shaky ground?

Have we got the wrong structural system? And are we only really going to perpetuate a problem because the foundations aren't right?

I think we don't have the wrong system to start with. One thing that I often say about Strata is it's like democracy. It's not perfect, but it's the best system on offer. So people often say to me, oh, so Strata's terrible. What's the alternative? Should it be co-ops or land trusts?

It's like, no, no, no. It's not the legal structure that's the problem. Strata really is the best on offer. But we have to be really mindful of the ways that it can go awry and the ways that it's difficult.

So I think one of the problems is that governments have radically underestimated the complexity of collectively owned land. So I think there's an assumption that strata is just about where Mrs. Koforps puts her bins or Mrs. Jones's cat meowed too loud. It's much, much more complex than that.

Collectively owned land is difficult because people have different motivations. And the strata system in Australia, I think, is also particularly problematic because there are so many vested interests tied up in it with... Ah, look, could I be this tactless this early? Snouts in the trough.

Snouts in the trough are a big problem in strata.

Well, can we unpack that? I mean, the snouts in the trough, what do you see, I guess?

This sounds like technical boring property law, but I promise it's not. And I say this over and over again about strata.

The key difference between strata and non-strata properties is that when you buy a non-strata property, and by that I mean a house in the suburbs, the land title you buy, freehold fee simple, when the developer subdivided that land, say it was a chicken farm on the outskirts of Sydney, they subdivided it into 500 housing lots, no developer can attach to that land title an obligation to pay money.

It's not an accident. It's how we dismantled the feudal pyramid.

And centuries of parliaments and judges have always known that if you allow current landowners to subdivide land and attach obligations to pay money to that land, they will use that power to benefit themselves and their mates as sure as the sun will rise. That's why it's prohibited.

And that's why if you buy a house in the suburbs, you pay your vendor, you pay your local council rates, but you will never be compelled to employ your vendor's cleaner. You'll never be compelled to buy electricity from a particular supplier. You'll never be compelled to repaint your house pink every five years.

It's a great rule. However, switch to apartment buildings, strata title. If we've got a collectively owned building, we need to maintain it. And you immediately run into a problem with that rule. because you can't sell freehold fee simple titles to apartments and attach an obligation to pay for the upkeep of the building.

So we have to overcome that rule because what we wanted to sell was freehold fee simple titles. And that's what Strata is. They're Torrens title freehold fee simples. So that's what the first thing the Strata title legislation does

It overcomes this prohibition on obligations to pay money attached to your land title, and it's the levying provisions. We all know they exist in strata. You buy a strata unit, you pay annual levies. To the extent that it requires you to pay for the upkeep of the building, no problems.

It's got to be painted, stairs have got to be fixed, no problem at all. The strata industry, however, and developers have recognised that the obligation to pay levies is an income stream they can tap. You have a group of owners who are, unlike non-strata owners, are legally obliged to pay money every year.

And if you can load stuff into levies, you can turn on a tap and basically have an income stream that benefits you or your mates. And that's what I mean by snouts in the trough.

There are some fantastic people who work in the strata industry who are providing really good services, but there is a section of the industry that is structured to provide turn on that tap and drain owners of as much money as possible.

This is a fantastic elephant in the room and it's particularly why we wanted to get you on. And I'm sure this is where it feeds into the energy thing too, isn't it? Because this is just another opportunity. It's another trough for snouts are going to, to use for analogy.

Let's go back a little bit though. What are we talking about? We know because we're in the space, but like from a consumer who's owned a home, house, who is about to buy into an apartment building, what obligations could be loaded up on them that they have no choice over versus what's fair?

And it'd be interesting to know from your point of view, the sorts of things that you've seen out there and what's legal. Again, it doesn't necessarily mean it's fair.

Yeah. I think the biggest difference, and because this is a buyer's agent podcast, and I'm very excited by the prospect of buyer's agents being able to stand up for their clients more so than clients are able to stand up for themselves.

I mean, personally, I don't understand why anyone would not want to look at property themselves. What else would you want to do with your time? I don't understand it, but I accept that it's good for people to sometimes get some help and someone to do it for them.

But I think there's a real good possibility that you guys can really educate clients about the differences of what they're buying. I think the big difference is off the plan versus existing apartments. The risks with off the plan are just unbelievable.

To be honest, I don't know why anyone buys off the plan ever. I mean, if I showed you a diagram of a toaster, if you want to buy a toaster and I said, here's a diagram of a toaster, this is what it'll look like.

And it may have these features and it may have this, but it may not. You'd probably say, oh, look, I'll just wait till it's built. And then I can feel it and have a go with it before I buy it.

But, you know, a $1.5 million apartment, sure, I'll buy it on a computer generated image. Now, I understand perfectly how developer finance works. And I know that developers can't get finance to build until they've sold a certain proportion of apartments off the plan.

And I know that the government guarantee is stepping in to try and alleviate that problem. I understand all of that. I'm not some kind of naive academic who doesn't understand how the real world works. I know how developers get finance.

But that doesn't change the fact that what we are asking people to sign up for is just, it's crazy. It's insane. So I routinely see off the plan contracts and they are somewhere between 1,000 to 2,000 pages long routinely. And all they disclose is possibilities.

So buyers are worried about, oh goodness, you know, what color will my benchtop be? Please, this is not something you should be concerning yourself with, whether you go for the dark shade of apartment or the light shade of apartment. What you should be concerned about is those 1,000 odd pages are

Disclosing and also failing to disclose a whole lot of things that you should know about. So what it'll tell you is there may be a building management contract. There may be a strata management contract. There may be embedded network. There may be a car share space. There may be a public accessible space.

There'll probably be some public artwork in there. If we're talking about mixed use development, the complexity just goes through the roof. So what is called strata subdivision, which I can talk more about later. But mixed use development, what you are buying into is an insanely complicated beast and

And at the point at which you are required to commit yourself to buy off the plan, there is literally no possibility that you understand what you're buying because it's not actually yet determined. And most lawyers and conveyancers couldn't explain the detail of that. That's not a failing on their part.

The detail is just not finalised. So you can't possibly know what your strata levies are going to be because none of the costs are finalised. not in any way, shape or form. You've got no idea what your strata levies will be and what you'll be obliged to pay for.

And that's a big thing. I think off-the-plan sales are a real risk financially. So, like I said, the list of your worries is the colour of your benchtop. It's how much your levies are going to be.

To give people a picture of this, somewhere like Central Park, which is the plant-covered building opposite UTS, if people are not in Sydney, it's near Central Station. Governments love to put it on brochures, this kind of plant-covered building. It's a Fraser's development. Lovely building, all the rest of it.

The levies for a two-bedroom apartment there are $15,000 a year. That's $300 a week on top of your mortgage. They're probably, most strata schemes are underpaying. I don't know if they are. I've got no idea. But That's the consequence.

If you co-own a tri-generation plant, a black and white grey water treatment plant, and you've got recycled water watering plants on the facade, and you've got open space that you're contributing to, that's the reality of those costs. I mean, that's what it costs.

So I think the new builds people should be extremely – the more bells and whistles, the more you're going to pay. And anything that says exclusive, exclusive means you own it, you pay for it. And that could be the streets. It could be the parks in a master-planned estate.

It could be all of the infrastructure. When you're buying older apartments – I think there are fewer risks, except you've got to obviously check if they've got problems of being run down. So you need a good strata lawyer who knows how to check those kinds of things.

But I mean, as a general rule, I mean, I say this to anyone who asks me, you want something built prior to 1999, which is when private certifiers were introduced, and you don't want a lift, you don't want a pool, you don't want a gym.

If it's a three-story walk-up and it looks solid, that's your best bet.

Cathy, I mean, you've highlighted a real issue, right? Which I hadn't really even thought about, to be honest, around the just really unknowing what your strata levels are going to be.

Because you don't really hear those stories too much where I thought it was going to be three and now it's six, but it obviously happens.

Just on the off the plan, I mean, I don't want to get you too riled up on it, but I mean, there's lots of other challenges when you buy off the plan that when you're signing that contract, you just don't know.

Look, I mean, I suppose the big thing that I've been doing research on recently is embedded networks. And I've worked in Strata for a long time and I've seen a lot of bad practices. And I think these actually take the cake.

So for people listening, an embedded network is, from an engineering point of view, it's a great idea. What it is, is the idea that an apartment building or a group of buildings can bulk purchase electricity to discount. It costs you less.

100 customers buying as a group costs less than all of those individual 100 people buying. So you're bulk purchasing electricity at a discount or you're generating it on site if you've got solar panels or a tri-generation plant. And that discount is meant to be enjoyed by people inside the network.

So that's the owners and tenants in the building. And you find them in retail, shopping centres, you find them in caravan parks, land lease communities, but overwhelmingly you find them in strata. So in theory sounds great. Engineers love them. They make perfect sense.

However, what is happening in strata and particularly in New South Wales, and this is a longstanding strata practice. It's just the latest iteration of it. Developers are allowing embedded network operators, which are third-party companies, to install the electricity infrastructure for free, to kick back to the developer.

So the developer doesn't pay for it. Why does the embedded network operator do this? Why do they do work, provide infrastructure for free? Because the developer assures them that they will make the owner's corporation enter into a contract with the embedded network operator.

And the longer that contract and the more it allows the embedded network operator to charge the owner's corporation, the greater the profit the embedded network operator will make. And that's how they recover their initial outlay and how they make money on an ongoing basis.

They've just been limited in time in New South Wales to three years. Probably doesn't actually help, but they would typically be 10, maybe longer, 20 years. The problem with embedded networks is that, I mean, the unfairness really is breathtaking.

They're justified and they are incentivized because we want to reach net zero and they are allegedly sustainable. Some of them are, some of them aren't. What is so deeply unfair about them is two things. One, owners are literally paying for their own infrastructure twice.

So all of that infrastructure is what's called a fixture in property law. So when we buy even an apartment or house, we're always buying land. We're not actually buying the physical structure. Anything that's nailed down to the land is a fixture and is part of the land.

So the pipes, the wires, all of those things are fixtures and they're part of the common property. And when you buy an apartment, you buy your individual title and you buy a proportionate share of the common property. You have literally paid for that infrastructure.

The fact that the developer hasn't paid for it, only in fantasy land would anyone believe the developers discount the sale price of an apartment because they didn't pay. Although I hear the embedded network industry routinely say this, and it's spectacularly dishonest, developers charge the top market rate for apartments.

What else are they going to do? The whole point of these arrangements is it's icing on the cake for the developer. They make a greater profit. So you're literally being required to pay for the infrastructure twice because you'll pay for the capital costs over the course of the embedded network contract.

And if you try to get out of the embedded network contract and change operators, the contract that was drafted by the developer and the embedded network operator, not the owners corporation, that contract will say, if you try to terminate it early, you must pay the capital costs at that point.

So most owners corporations can't get out of them because they don't have $20,000 in their back pocket or more.

The second thing that's incredibly unfair about them is they work on the assumption that it is acceptable for the embedded network operator to take the discount from bulk purchase or generation of electricity as their own profit.

So although it is the owners and the tenants who produce that discount because they are the bulk, they are the people that produce the discount, it's skimmed off as profit by embedded network operators. In worst case scenarios, there are lots of buildings in this situation.

There are solar panels on the roof of the building and the embedded network contract says the embedded network operator can sell all of the solar energy generated back to the grid for its own profit. It doesn't have to provide any of it to the owner's corporation.

So despite the fact that this is all incentivized on the grounds that we're getting green apartments It's just being sold. It's green energy, but it's being sold back to the grid. Yeah, and there's no way of getting out of it.

And also because apartments are not constructed with individual national meter identifiers, people cannot change electricity providers. So people in apartments then can't benefit from market competition.

For anyone who still believes in market competition and electricity, that it produces better outcomes for consumers, you can't actually get market competition because you can't change providers because you don't have an identifiable meter.

Oh, my God.

So obviously you've got two entities negotiating these contracts which benefit those two entities and the people that are going to be left carrying the can effectively have got no say but also quite often wouldn't even have an awareness that this has even gone on because they just wouldn't dream of it.

I'm going to just be the devil's advocate just for a minute, even though I don't really believe what I'm going to ask you. But I'm sure that the argument could come out that, well, look, the development wasn't feasible beforehand. It's something like this.

This negotiation allows us to bring this additional facility to the building and allows the development to get out of the ground in the first place. Is there a case for that to be a valid argument?

Look, there's no doubt that development is hard. Don't get me wrong. I know development is hard. And I mean, when I wrote my book a number of years ago, I was looking back at the 1970s.

And with the exception of Lendlease, I don't think I could recognize any of the names of the developers who were building apartments in the early 1970s. They've all kind of gone to God. That's the nature of small scale property development is really hard.

And I know the costs of construction at the moment are just insane. And I believe developers when they say we can't make a profit unless we charge this amount. The only difficulty with that is, I mean, there's a few things.

One is there's no point building housing if people can't afford to live in it. So if at the end of the day what you're doing is getting housing off the ground through structures that actually exploit owners and are unaffordable in the long run, what's the point of doing it?

Inability to pay strata levies is the single leading cause of bankruptcy in New South Wales today. And when you are made bankrupt, your trustee in bankruptcy gathers together your assets, including your home, and they sell them to pay your debts, which leads to homelessness.

John Englow, who's the wonderful head of Shelter New South Wales, refers to it as strata poverty. They didn't used to do a lot of this work. They do lots of it now. It is typically in relation to three-story walk-ups.

If we know that people are struggling to pay their levies in a three-story walk-up, how do we expect them to pay levies in these vastly complicated developments? The second thing is there is no end to the ways you can shop up an apartment building and engage in this practice.

So you could get, the developer could say, well, I'm going to get a sustainable flooring company to install all of the flooring and I'm going to get it for free.

And the flooring company will be paid because they'll get a contract with the owner's corporation that the owner's corporation has to have the flooring cleaned every six months and replaced every two years, whether it needs to be replaced or not. This used to happen with lifts.

You could do it with, I don't know, solar panels on the windows, all manner of things. You're on a hiding to nothing doing it. I should also say that this is just an example of a practice that's happened in Strata for probably about 50 or 60 years around the world.

So in Queensland, it's known as management rights. It's actually written into their legislation. Developers, the assumption was made that the entity that has the right to sell the business that's associated with managing an apartment building that's a tourist scheme, basically. We're talking about holiday apartments.

The entity that has the right to profit from that business is the developer. I don't understand the logic of this. The entity that's entitled to profit from that business is the owners. But Queensland has dug itself into a massive hole in relation to management rights.

People have gone to the Gold Coast for a holiday and thought, you know, gosh, it'd be good to retire here and manageability. They buy management rights. It's hard work.

And then buildings, people have gone to the Gold Coast for a holiday and come back a unit owner, also discover they own in a building where they don't actually have any choice or control over who manages their building. That person in Queensland has a 25-year management contract.

And what it's become now is just an asset that people trade and the banks are involved as well because they've lent on those. It doesn't work and it just leads to dispute.

So is it all these sort of, you know, snouts in the trough, I guess, you're better networks.

Is this, you know, you said the system's okay, Strata's fine, but it's when these conflicts of interest between the developer and the Strata manager and the owners and when they sort of step a bit too far into...

you know, what's in it for me rather than pulling up stump and going, no, we're making money on the actual build and the developer. We're not making money on the management and where the housing system, you know, the way that they cut up doesn't have that real issue because of the law.

So is that where we need to go? Like, is that where you think that it needs to become a legal change to shift to, basically make it illegal to offer these.

And do we have to go retrospective and say, okay, well, that was a 25 year agreement that can be cut up now because it doesn't comply with current laws.

Yeah. What we've done is we've played what I call legislative whack-a-mole. So every time there's a problem with these, so it used to be strata management contracts. So strata managers had been installed by developers for long periods of time.

Then it was building managers, caretakers, utility contracts, and they all cause problems because when you sell people property, they expect that not unreasonably, they will control their own property. They bought it, they own it, it's theirs. And so all manner of problems arise.

Also, people discover any contract that is negotiated by two parties, neither of whom will pay it, is going to be a bad contract. So if the person who's actually paying the owner's corporation was not involved in the negotiation, it's not going to be a good contract.

So eventually there's community outcry, consumer, you know, actually I don't hate the word consumer. When you buy a home, you're not a consumer. It's a basic human necessity. So people who buy homes, there's an outcry.

And the government plays a whack-a-mole, legislative whack-a-mole, which is say, right, strata management contracts, whack, they can only be three years long. Building management contracts, whack, they can only be three years long. Utility contracts, whack, three years. We're just limited embedded networks to three years.

There are different contract lengths in different states for things. I think we're just fiddling while Rome burns because developers and the industry have ways of getting around things once they're installed.

The simple fact is the only entity that should be forming contracts for an owner's corporation is the owner's corporation made up of owners. It's their building. They own it. they are the ones who are entitled to decide.

You may need to install a manager or a strata manager for the first year until the owner's corporation's up and running, no problems, but no longer than that. I did some research on this many years ago and I looked at the US.

So the US condominium industry almost collapsed in the early 1970s because of these kinds of contracts, sweetheart contracts they were called in Florida and New York. And they were for things like developer puts in a pool and rec facilities, but leases it back

the owner's corporation leases it back to the developer who then leases it to the owner's corporation for an exorbitant fee. The US introduced legislation eventually that said owner's corporations can terminate any developer-made contract on 90 days notice. And in a puff of smoke, those problems largely go away.

If you cannot acquire a long-term or lucrative contract in you don't provide developers kickbacks in return for that contract. Basically, you won't buy a contract. That's what we need to do to stop it.

It's pretty clear and it seems pretty simple. So why haven't we? Why hasn't it got to a point in Australia where that's been done?

Watching legislation being made in Australia can be a little bit hair-raising, if you ask me. We have a lot of consultation, stakeholder consultation. I mean, this is a wider problem. This is, and I don't mean any criticism of departments who are involved in this.

They're expected to do it, but I've been involved in it. It's a bit like asking the foxes to be in charge of the henhouse. I mean, yes, by all means, consult stakeholders, consult developers, consult strata management industry.

But at the end of the day, the government needs to step up and say, we've talked to everyone and this is by far the best option. And they're often trying to do it.

I'd say, you know, gold stars to New South Wales Fair Trading who are working so hard to fix these problems, but it can be an uphill battle for them.

The thing about consulting stakeholders is that there's no one body that represents the owners. And it's the same in property investment space as well. There's a lot of noisy people getting involved in legislation, but the actual owners are not unified and don't have, you know, a lobby group effectively.

Is that part of the issue?

Well, there is the Owners Corporation Network and they're very good. They represent apartment owners, but it's a voluntary organisation and it's hard. I mean, they're actually wonderful.

I go to their conferences every now and then and they're actually fabulous because a lot of older people who've downsized into apartments and it's this fabulous opportunity sort of energetic fury in the room, absolute fury. Like it's actually, it's wonderful.

They are often older people who've been very experienced at work, have been accountants, have worked in business. They buy apartments and they just go, what? Like... How? And they're great, but they're a voluntary group. It's hard for people to lobby.

I actually think buyers agents, you guys have a really important role to play because a lot of this is, you know, if people just say, I won't buy, particularly property investors, look, investment in residential property is not my favorite thing. I think we need to get investors out of the market.

I think they're a big part of the problem. But if you're representing owners who, to the extent they do have a choice, and they often don't have a choice, but the extent they do just say, actually, no, I don't want this product. I won't buy it. I don't want a new apartment.

I tell you what, I agree buyers agents could be. Sadly, we have a very low barrier to entry in our industry and there's a lot of people who really would have no idea of anything that you're talking about and they're probably not even interested.

You're singing to the choir here or preaching to the choir here because we've long held that buying off the plan is extremely risky.

And for lots and lots of reasons, things you haven't even touched on, but one thing that you have touched on that Chris picked up on earlier was that sort of the risk of the levees are completely out of your control.

It's funny, I've written a number of articles on this, but that's one thing I don't think I've ever put in there. I'll be adding that to the next one I write.

I should say also, sorry, off the plan, the really risky off the plan of the mixed-use developments, because this is something I know a lot of people don't know anything about, but stratum or volumetric title. So, stratum is not strata.

So, all of the mixed-use development the government is currently incentivising and urban planners are very big on rich, dense, mixed, you know, cities, all of which is great. It's unreal. We don't want resi only. That's kind of boring.

But I think almost nobody, and certainly I don't think the Department of Planning, I don't think developers actually understand. Sorry, excuse me, not developers. They do understand how it works. But I don't think many buyers understand. I don't know that planners understand it.

This structure is you chop up a big site into five what are called stratum lots. Two of them might be retail podiums. One's a commercial building, one's owned by a community housing provider, and one's a residential tower.

If you want the residential tower to be apartments, you further subdivide it by a strata plan. The strata legislation only applies to that tower. It's the only part of the development that is strata title. The rest of it is not.

Obviously, all those bits, those five bits of the development are sharing a site and often a building. You've got to get them to pay for the upkeep of shared facilities. It's not common property. It's shared facilities. Might be a plaza, might be car parks are shared.

And the way that's done, we run into the problem of positive obligations on freehold land. Again, you can't use ordinary property law. So the law was changed to allow for the registration of what are called in New South Wales strata or building management statements. They're not bylaws.

Well, they do have contained rules in them, but they allocate the costs for shared facilities. They are entirely written by the developer's lawyer or surveyor. And I can assure you they will benefit the commercial and the retail, particularly if the developer's retaining the commercial and the retail.

So you've got a five lot strata subdivision, one or two residential strata schemes, and three retail or commercial retained by the developer, that strata management statement which determines all of the ultimate costs will not be written in the residential owner's favour.

I'm on a personal mission to help more people make better property decisions. You know, most people don't realise that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need.

And what I do is help people with tricky real estate problems, which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting or should I buy before I sell or the other way around?

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

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And so we're going to a bit of a new world with Chris Mintz and changing planning controls. And, you know, it's been a tough time for developers. This isn't anti-developer per se.

Like we're not saying that we can't not build anything, but we're saying there's challenges with the way that we are building, I guess. And a lot of that will be commercial. It'll be mixed, right? A bit of it to make these feasible stack up. Let's say they do get what they're hoping, right?

A bit of a building boom over the next, say, decade, particularly in Sydney. That's what the aim is, right? Is through rezoning. You know, do you see that this is really going to be a big problem in 10 years? Besides those embedded networks.

And do you think there's other issues that we're just not thinking through?

So, I mean, it's good that you say this is not anti-development. I'm not anti-development at all. I mean, I specialize in strata title. I've got no problem with apartments. And I think it's really important to build them.

I have reservations about the way we're going about a lot of stuff and the assumptions that are being made. So, for example, I mean, you can't address supply without addressing demand. That's one big thing.

And the thing I always say, if you sell 50% of the apartments you've built to investors, people my age, you've just halved the supply. to young homebuyers. Just thinking in terms of supply, I think it makes no sense.

That said, in fairness to Minns, state governments don't control tax policy, which is what incentivises investment, what incentivises me to bid against my own children. My husband and I will get a big fat tax benefit from outbidding our own children for an apartment. That's crazy tax policy. That's just mad.

People who say, well, it produces more housing. Yes, it produces more renters. I firmly believe in home ownership. I think there is a reason why people want to own their own homes, and I think it's a good thing. So, yes, I hope we do get more building.

I wish it was more building for homeowners. I do think we're in a bizarre situation at the moment, though, where people who work in strata and the ongoing management strata all know there are serious problems. There are massive challenges, and yet we're just building more of the same.

We kind of need to fix the problems. Otherwise, we're just, you know, it's inevitable. we're just creating more of those problems and more complex problems. I do really worry about large-scale development, about the affordability of it.

The simple fact is a big complex high-rise building is expensive and it doesn't matter that you split the cost between 500 people, it's still expensive. And I know developers say that the finances of building three to six stories doesn't stack up.

I don't know what the answer to that is, but I also think this kind of not much point building housing that people maybe don't want to live in is not manageable for them and is going to be prohibitively expensive. I think we do need to seriously address that.

So that's interesting. So the concerns you have is if we try to go too big and too big in these high rise, high density locations, which is kind of what we built in the 2010s and the 2000s, right? And we put them all in a little, but building sort of smaller developments, right?

and sort of, you know, three or four townhouses and three or four levels, this is where you're much more excited.

So the missing middle that we should be activating, that should be the focus rather than, hey, this transport orientated development plan around, hey, build as high as you want basically around the train stations. Is that your concern?

Yeah, I think so. So I think some high-rise buildings are fine, but they're basically not manageable for ordinary people. You know, the basis of strata is you own it, you run it. The buck stops with you. People talk about the strata, my least favourite term in the whole world.

There's no such thing as the strata. There's an owner's corporation and it's made up of owners and the buck stops with them. It's their building, they own it, they have all the responsibilities.

They can employ someone to help them and that'll be a strata manager, but the strata manager is not the source of authority in a strata scheme. But it's very, very difficult for lay people to run a 60-story building. That's really, really hard. They can't do it.

I think it's possible for people to manage a three or four-story walk-up. I think they're manageable to live in. I think they're easier for people to live in. We've been doing them for years. Yes, there are maintenance problems, all the rest of it.

But I do think there are good, you know, most architects and planners would say they're a really good form of development. I also love the idea of terraces and semis, but please God, stop making them strata unnecessarily. That's another big problem we have.

So this completely, honestly, I've never been able to get to the bottom of it. I do not understand why councils say the land size is too small to subdivide, but you can do a two lot strata scheme. Strata is subdivision.

If you do a two lot strata scheme, you have just subdivided the land into two Freehold, fee simple, Torrens title, lots. That's what strata is.

Totally agree with you on that. In the inner west is where I am. Like our council before at Buchanan Inner West, they decided 400 square metres was a minimum lot size. Was it 200?

Sorry, 200 was a minimum subdividable Torrens title and all of a sudden you get two that have 380 and they're subdivided. There's strata and they're just unnecessarily complicated.

Yes, totally. They've got no meaningful common property, no reason to be a strata scheme, but guess what? They've got about 700 sections of legislation that regulates them. They've tried to make stuff simpler for two lot strata schemes. They just shouldn't exist at all unless you have meaningful common property.

And you think about it, all the terraces and semis in Sydney that we've had for 150 odd years, they're not strata. And I can assure you, you almost never, ever see disputes in law reports about those forms of housing. Yeah. Even without his party wall easements.

It's just like – Yeah. It's interesting too because wasn't it – I'm not sure you did this research some years back. It might have been Nicole Johnson that was the optimal size for a happy strata community was like 40 units. I think there was something – so that sort of talks to –

what you're talking about there. It's manageable. People will know each other. It doesn't get too complicated. We look at how buildings are run and it's interesting that you draw that line. It's sort of 1999.

We look at that as well because obviously pre the private certifier and all those, and we're talking New South Wales here, but there's somewhat similar things that have happened in other jurisdictions. But when the private certifiers came in, they just took the responsibility away from councils, right?

And so therefore, responsibility and accountability as well, really. And then we started seeing this real problem with defects. And so, of course, in my business, when we look at strata reports of existing buildings, we are looking for that history of how that building has been run. And some of them are amazing.

They're really well run. You think, I want to be in that building. Others are shocking because nobody seems to care and nobody seems to understand their obligations. Or they might have actually have a hangover in the sense that they've inherited all these issues that nobody knows how to do anything with them.

You talk about, though, you don't think investors should be playing such a big part because these buildings should be built for owner-occupiers, not investors. And you recognize that the problem is that the developer's got to get pre-sales in order to get out of the ground in the first place.

And often they are investors. But I see a big problem with resales, first-time resales of new apartments. being the highest, this is lots of evidence of this, the highest segment of the market that is sold at a loss.

So first home buyers getting into that market, you're talking about risks of buying off the plan. The first home buyer, investors, they can do their dosh. But first home buyers, this is your opportunity to get into that property market. And ultimately, they tend to want to upgrade at some point of time.

So there's a problem too, in terms of who's incentivized to get into these developments.

Yeah. I mean, I see that. I wonder, though, whether there's, I mean, the rise of building defects and the rise of investment in residential apartments kind of parallel each other. If you look at, you know, that it is in exactly the same period in history.

You do have to wonder about whether investors, well, it's just a widget. They're all the same. I don't care. I'm not going to look at it that much. As long as the benchtops look nice, I'll just buy it. I mean, maybe it's naive to suggest that first-time buyers might be more careful.

But I mean, I wonder if you're buying your own home, whether you do check more. Because I think there are investors who just think it's just a widget. I don't care. I don't need to know anything about the building. I don't need, you know, the strata will do it for me.

It's just an investment and I'll flog it. I do wonder if there's a connection between how long it took us to fix building defects and the dominance of investors in the apartment market because they overwhelmingly, it's the apartment market that investors are in. It's not the residential housing market generally.

It's largely in apartments. I mean, I've taught and researched property law for 30 years and, you know, look at more than apartments. And I do think Australia, I think many countries have lost sight of this. Residential property is not an optional consumer item. Without housing, you literally die.

Like if you have to live on the street, you will eventually, it'll affect your health and you may well die. So it's not like, oh, well, Somehow people are being precious because they want a home. Residential property is a basic human necessity.

Encouraging one segment of your population to stockpile a basic human necessity to build their own wealth is always going to be at the expense of another section of your population who needs housing. It's just inevitable. That's where the wealth comes from. We would not encourage people to stockpile food.

People would consider that deeply offensive. We're going to stockpile food and then sell it on to our fellow citizens at an inflated cost because we have more of it. I'm not anti-investment. I mean, sometimes I go to conferences and people say to me, oh, but Cathy, you're an academic, so you're a socialist.

It's like, I am so not a socialist. I firmly believe in private property. Encourage investment. Invest in commercial property. Invest in shares in companies that are doing something productive.

Investing in residential real estate is really poor policy because it's not a productive industry other than initially for developers. It just isn't. We need housing and it's absolutely okay for people to make money out of other people's need for housing. But it's a really, it's really poor policy.

I mean, I love Alan Kohler's quarterly essay, The Great Australian Divide. I think it's fantastic. I think there are a lot of Australians who are too young to know that it wasn't normal for people to invest in property to build wealth. And I also don't blame people who've done it.

You do rationally respond to tax policy. I mean, I blame the governments who introduced it, the Howard government and the governments who refused to deal with it, the Ebenezer government.

I like your point around, you know, what the bad building behavior, I guess, you know, the quality that we've built was aligned to the investor-driven market. And as that shifts to a more of an owner-occupier-driven market, maybe that will lead to better building outcomes.

And, you know, and then potentially buildings that are driven more by owner-occupiers are better to live in, they help better resale value, you've got less people turning over, people live in the longer. And so I do think that they're going to perform better from an asset class as well.

It's just, I think we're in that transition phase. And like you said, maybe it's 50% now and maybe it needs to be more like 20%.

But there is also an argument that a lot of people say that, okay, well, don't do negative gearing, but do negative gearing if you buy new stuff and give them a higher CGT discount on those people who build new housing because it's creating more supply. So there's also that argument.

So the people who are anti say negative invest, because we need rental housing as well, right?

When you're growing your population and a lot of people can't afford to buy, even though they want to buy, it's kind of, we've got that challenge as well, where there's a role that investors are playing there for society. If governments or corporations aren't providing that, who is, I guess?

I think the thing is, I mean, Alan Cole, as I say, is interesting and he really pinpoints it. It's not so much negative gearing, which we've had for ages. It's the capital gains tax partial exemption, which was introduced in 1999.

And when then we saw at the very end of 1999, it was a bad year, 1999. then we saw a really steep rise from 2000 onwards. I've got to say, I don't buy the investors are doing, you know, a service to society. Every time an investor buys a property, a homeowner dies.

I'm sorry. It's like Tinkerbell in Peter Pan. Every time someone, an investor buys, they've stopped someone buying a home and they've made that person a renter. And I mean, I know there might be an argument to say, well, if investors provide the money, we'll build more.

We've been doing that for 25 to 30 years. And what I say to people is, how's that worked out for us? We've been incentivising investment in residential property on the assumption that it produces supply. And it's not just, I mean, there's also the FERB exemptions for new builds.

So when you mention new builds. So the Foreign Investment Review Board exemptions you get for new builds in Australia. So foreign investors can't buy existing property, but they can buy new property. That's to incentivise and to prop up the building industry.

And what I would say to people is, where has that got us? I mean, it's got us in a very, very big hole. So it really is the case that, you know, when you think about it, if you build 20 apartments...

and you've got 20 young homebuyers who want to buy and they're the only ones bidding, they're going to buy an apartment each. You add 20 investors to that and the chances are all of a sudden you've got way more people going for property.

I mean, if everybody only ever acquired one property that they need to live in, then that would put a significant reduction in pressure on supply. We're actually generating artificial demand for purchasing houses because we're encouraging people to buy more than the home that they live in.

And literally every time an investor buys a property, they force somebody else to be a renter.

What's your thoughts then? I mean, there's lots of other changes. I mean, with tax policy, for example, you know, if you can't invest, would you just buy yourself a nicer home because it's tax-free on your home? I know that there's this thought that, oh, I'll go and buy shares.

Well, I can't put more in my super because that's sort of limited now. Like people will think you cut that, you change the incentive, you change the behavior. And how do you feel about that then? If the person doesn't leverage that to buy, yeah.

I mean, in terms of individual people, I know why people buy houses, safest houses. And also people understand it. Look, I'll be the first person to say you're buying and investing in the share market's complicated. Like, how do you know what companies are really doing? Like, you know, that's a risk.

Most people can understand housing and that's why they buy it. But I'm saying as a tax policy for a nation. So I get why individual people do it.

But as a tax policy for a nation, it's really poor policy because it's money that doesn't go into, for example, companies that are doing R&D or are creating real things or cochlear implants or providing health care or. This is all productive stuff.

And there are many countries that don't have the kind of policies that Australia has. And, you know, again, plenty of economists, you know, you ask, I defer to people much more learned than me in this area, like Saul Eastlake and, you know, Alan Collins, they will all say the same thing.

I mean, Alan's essay was really interesting where he said there was literally three economists who recommended the capital gains tax parcel exemption, and they thought it was going to encourage people to invest in shares and it didn't happen.

And economists have been consistently saying ever since you have to get rid of this, it's bad tax policy.

We've got a few minutes to go, but the smart cities, sort of smart green cities, the sort of the movement there. And I mean, you highlighted one of the challenges with Central Park, but what's sort of the thoughts behind that and the work you do?

So I work at a research centre called Smart Green Cities, which is absolutely wonderful because I get to work with everyone from engineers to people who deal with furry animals in cities. I love one of my colleagues who does urban ecology.

The person who runs the centre, Michelle Leishman, has a fabulous project, What Tree Where. which tells people what trees to plant for climate change. So trees that are going to live for 30 to 50 years, plant the right tree. I think it's all about making cities more livable.

There's no doubt that the more people you pack into small spaces, the harder it is for human beings. It's difficult for high density cities to be livable. So we have to be clever about that. We have to be smart about it. We have to prioritise green space. We have to prioritise public space.

My research, it has to be genuinely public and not just publicly accessible and paid for by apartment owners as common property. So how we pack lots of people into small spaces is hard. It's a difficult thing. We need to think seriously about it.

And that's what the centre does, a whole range of things, everything from ecology to technology.

Fantastic. I think we should put the link in the show notes for that, actually, so people can find out more about it. Cathy, we like to wrap up every show with an example of a property Dumbo. It's along the elephant theme. It's something that we can all learn from.

Have you got an example for us?

I do. And it's also an elephant, so to speak, example. It's literally an animal example. So one of my pet hates, excuse the pun. He's poor bylaws, badly drafted bylaws. And there have been a raft of terribly drafted bylaws about animals.

We finally kind of, I think, got rid of a lot of them in New South Wales and Queensland.

But I'm going to give you my favourite piece of legislation, which is the ACT strata legislation used to have a provision on animals saying that people could keep any animal, mammal, and in brackets, excluding human being.

And I always used to wonder, so what is it about Canberra that you have to tell people that they can't keep a person as a pet? And I shouldn't say that mammal includes elephants. So apparently, truly silly regulation.

Well, my boy would love that. My boy is absolutely obsessed with animals and mammals. I'm learning about every animal I live in. I think it was a male at the moment, so... Yeah, it's not all wonderful worlds of pets we could have. Thanks so much for coming on, Kathy.

It was a really good chat. Absolute gold and wisdom and made me laugh multiple times. And so thank you so much. It was a great chat.

Thank you for having me and keep up the good fight for people who are buying homes. You're doing good work.

Well, it's our pleasure. Thanks for coming on, Cathy. I actually thought this was going to be quite a dry legal argument, the whole thing, but it's turned out to not be that at all. It's been a delight to chat with you.

And I think we'd love to get you back on at some future point too, because there's a lot of little threads that we could pick up from this chat and really go a bit deeper on. So thank you so much for your time. That's a pleasure. Thank you.

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