Regulation Update: Housing Consumer Protection Bill 2019 – Draft bill

The department of human settlements, water and sanitation has published for comment the Housing Consumer Protection Bill of 2019.

The bill aims to amend the Housing Protection Measures Act of 1998 (amended in 2008). The bill is still in draft format and aims to expand the mandate of the National Homebuilders Registration Council (NHBRC). It provides for the NHBRC’s continuation in an expanded National Homebuilders Regulatory Council.

Read the bill at the following webpage. Note that the department must receive comment by no later than 29 October 2019.

Most affected industries

The industries that stand to be most affected include industries related to building contractors, property developers and maintenance, renovations and repair service suppliers. Housing consumers should also consider the likely impact of the bill on the supply and cost of new buildings, additions to buildings, repairs and renovations.

Initial considerations of the bill’s economic impact (not a formal comment)

While the intentions of the bill, explained as the protection of Housing Consumers appears admirable, intentions can never be the measure of success of legislation or interventions. Any benefits produced by legislation and regulation necessarily come at some cost. The question is whether the benefit of regulation actually exceeds the cost.

As with any policy proposal, we should not only investigate a legislation’s existing and visible outcomes, e.g. in this case we may even ask how much real benefit the NHBRC has actually created? However, we should also consider whether a legislative proposal is likely to produce serious unintended or counterproductive consequences.

These may include perverse incentives (such as those seen in regulatory monopolies), rent-seeking and corruption, and, importantly, the crowding out of market-based solutions to regulator’s concerns.  Market-based solutions, one should consider, don’t require taxes and costly government bureaucracy to administer.

Importantly, one has to consider that government mandates for product quality and improvements, and warranties can only come at an economic cost. To illustrate, it’s certainly within the realm of current engineering capability to build houses that would last for hundreds of years and withstand category five hurricanes, while requiring only the sun to power. But clearly, such projects would be prohibitively expensive and inaccessible to most of us.

Taken to the extreme, one could easily see that a regulation such as an extreme building quality standard, which may for example require any new buildings to be built to last for at least ten thousand years, would simply be too expensive for the housing consumer market to bear.

Moreover, simply claiming that the market economy would give zero protection to consumers is false. Certainly, not all builders would build recklessly and manage projects dishonestly. Damage to reputations, losses of future projects and liability under common law would (and do) disincentivize many from reckless conduct.

Moreover, private building associations, consumer information agencies, and even private builder certification bodies could be established on the market and would serve as a form of protection.

Moreover, clauses on acceptable quality and penalty provisions could be added to building contracts. Trustworthy law firms could even be hired to manage progress invoicing and to place monies in escrow until project completion. Such measures are likely to happen even in the absence of national government regulation.

The benefit of this ‘free-market’ state of affairs is competition among various ‘regulatory’ agencies. Such competition also allows consumers to choose the degree of protection they are comfortable with.

To be fair, the assumption of regulators, apparent in this legislation as well, is that market-based forms of consumer protection will be ‘underproduced’. It’s the supposed ‘underproduction’ of consumer protection that is regarded as the sanction for intervention. However, the necessary upshot is that such regulation, compliance and registration interventions are likely to result in more expensive buildings, renovations and repairs for all consumers.

More expensive projects would mean less business for the building industry in general, while certain consumers, on the margin, may be dissuaded from undertaking new projects, repairs and renovations, which is sure to affect consumers’ quality of life.

Suppliers in the building industry may lose business and suffer if fewer projects are undertaken. Moreover, as is always the case, more onerous requirements for compliance are likely to serve as a measure of protection for large and established incumbent firms with sizable compliance departments, while simultaneously serving as a barrier to entry for small and new firms.

In the end, regulation has to be carefully evaluated. Industry regulation is also a complex matter. Finding the appropriate trade-offs between product quality and consumer protection and the added costs that regulation produces, is not as simple as legislators may like to believe.

While we are indeed sympathetic to the idea of wanting  consumer protection in the housing market, we are not sure that the necessary consequences and cost of the proposed regulation have been considered broadly enough.

Sakeliga will prepare comment on the bill along these lines.

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