We are in a housing crisis in Victoria and community housing providers are struggling to make much-needed social housing projects stack up. This article explores whether the forthcoming developer bond scheme and the current domestic building insurance (DBI) requirements, that are intended to protect owners of residential premises, should exempt social housing projects to help get more social housing delivered for less money.
What is the developer bond scheme?
From 1 July 2026 developers of residential apartment buildings of more than three storeys will be required to pay a financial bond to be held by the Victorian Building Authority/Building and Plumbing Commission. The bond must be in the amount of 2% of the total build costs, is to be in place for two years following the issuing of the development’s occupancy permit and can be claimed by the owners corporation where they need to pay for the cost of rectifying defective building works identified in the final report prepared by the building assessor. The introduction of the developer bond scheme seeks to protect owners of apartments in buildings of more than three storeys which are currently exempt from the requirement of DBI (discussed in this article below).
Developers have started grappling with the implications of the cost of developer bonds on the feasibility of their projects and how they can commence future projects with significant money tied up for years in developer bonds. But community housing providers should note that, as the developer bond scheme currently stands, they will be required to put up developer bonds on their apartment projects which have more than three storeys. This is because they may fall within the definition of developer in the Building Legislation Amendment (Buyer Protections) Act 2025 (Vic) (“the owner of the land on which the residential apartment building is affixed”) and because section 137ZR of the Act requires any person who applies for an occupancy permit for a residential apartment building to have put up the developer bond.
Is the developer bond scheme sound policy for social and affordable housing?
The purpose of the developer bond scheme, as set out in the second reading is laudable, being to “introduce new financial protections for consumers through a developer bond scheme for apartments with a rise in storeys of more than three”. But it makes no sense to extend the developer bond scheme to social housing projects, noting:
- On community housing developments the community housing provider is the developer and not a consumer purchasing apartments under off-the-plan contracts.
- The developer bond scheme would require community housing providers to tie up a significant amount of their money in developer bonds to reimburse themselves for the cost of rectifying defects in their own apartments if defects are discovered. That is very different to owners of non-social housing apartments getting comfort that defect rectification can be funded by the third party developer.
- Community housing providers typically are required to retain ownership of the apartments they develop well beyond two years after the issuance of the occupancy permit. So if and when there is a subsequent consumer purchasing an apartment in that development the developer bond will have long been returned.
- Community housing providers seldom register a plan of subdivision for their apartment developments or put in place an owners corporation. As the owners corporation is currently the only one that may make a claim on a developer bond, on social housing projects the developer bond may be held without anyone being legally able to make a claim on it.
- With the help of their external project managers and architects, not to mention the registered building surveyor and independent certifiers required by Homes Victoria on larger projects, community housing providers are far better placed than most owners to help control the quality of the building work delivered and therefore minimise the likelihood of the defects that the developer bond is intended to cover.
We have yet to see the regulations that will detail the specifics of the operation of the developer bond scheme. But given that community housing providers are not consumers of off-the-plan contracts that require protection from developers, and that the developer bond scheme as currently drafting would see community housing providers tying up significant amounts of their own money to pay themselves if at all, community housing providers should start lobbying the Victorian government now to get their social housing projects exempted from the developer bond scheme in the regulations.
What is DBI?
DBI is mandatory for builders carrying out domestic building work worth more than $16,000 (soon to be $20,000). The primary exemption to this requirement is developments with more than three storeys (excluding basements). Social housing projects carried out by community housing providers will therefore need DBI unless they are multi-storey developments. DBI is intended to provide some protection to homeowners (including subsequent owners) in the event their building project cannot be completed or if defective works cannot be rectified because the builder has died, disappeared, become insolvent or failed to comply with a Tribunal or Court Order. But community housing providers should note that:
- Being considered developers for the purposes of DBI (unless delivering less than three homes on a site), their DBI “may” exclude claims for non-completion of work. That is, their DBI will not cover them for non-completion of work if their builder goes insolvent.
- While DBI covers $300,000 in claims for any one home in a project:
- non-structural defects are only covered for 2 years after completion of the work;
- even though structural defects are covered for 6 years, the threshold of what is considered a structural defect is high; and
- the insurer may nominate the builder who must rectify the defects.
Is mandatory DBI sound policy for social housing?
We think the requirement for DBI for domestic building work generally makes sense. But we query whether it is an unnecessary additional handbrake on the delivery of social housing developments for the following reasons:
- The value of DBI premiums is a concern. In this challenging construction market every dollar counts, particularly for not-for-profit community housing providers.
- DBI is very difficult to obtain for a builder taking on a larger project than what it typically builds. On bigger projects mandatory DBI is pushing community housing providers to a limited pool of bigger builders. While higher tiered builders are great at what they do, they have higher preliminaries and costs. By effectively forcing the use of bigger builders on larger projects, the requirement for DBI is materially driving up the cost of larger social housing projects.
- DBI sensibly protects subsequent building owners. Community housing providers are, however, typically long-term holders of their dwellings. Subsequent owners would therefore not be prejudiced if all social housing projects were exempt from DBI.
- Most community housing providers are today pretty experienced and sophisticated property developers. They are more than capable of properly vetting their builders to minimise the risk of insolvency and they have sufficient leverage in the market to require terms in their building contracts which help protect them in the event of insolvency, e.g. parent company guarantees and direct warranties from key subcontractors. This is just as well as, as noted above, they are not covered for non-completion of work if their builder goes insolvent.
- As noted above, community housing providers are also far better placed than most building owners to help control the quality of the building work delivered. Community housing providers can therefore minimise the likelihood of the defects that DBI may cover.
- Domestic building works undertaken (as opposed to funded) by Homes Victoria are exempt from the requirement for DBI and that in New South Wales social housing developments are exempt from the equivalent scheme.
Conclusion
No one is likely to argue against trying to provide safeguards for apartment and housing owners against disappearing builders and defective workmanship. But the application of the developer bond scheme and DBI to social housing projects provides little additional protection for community housing providers in comparison to the steps they can take themselves. When limited protection is weighed against the costs of complying with these requirements, we consider that the developer bond scheme and DBI should be optional for all social housing projects in the interests of reducing costs and getting those projects built.
How we can help
If you want to know more about the application of developer bonds and DBI to your projects, or requirements for social housing developments more generally, please contact Hugh Watson or Kate Gorman.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.