The Sydney apartment market is on a roll. Apartment prices have risen by 10% over the twelve months to 1Q15 and transaction volumes are close to a post-GFC high. Sydney’s residential landscape is changing as apartments make up an increasing share of the dwelling stock. Ownership of these apartments is typically under a strata title scheme.

Strata title is a big issue in Sydney. The Property Council of Australia (PCA) estimates that around one quarter of the NSW population lives, owns or works within a strata title scheme. There are 65,000 strata title buildings in NSW and more than half are more than 20 years old (PCA data again).

This brings us to proposals to make changes to strata title laws in Sydney.

Under current arrangements unanimity among owners is required before a scheme can be terminated. This is hard to achieve. There is a big incentive to be the last hold-out. People have been known to buy apartments in run-down blocks with precisely this objective. So, development is discouraged, leading to crumbling old apartment buildings – clearly an inefficient outcome. But the unanimity rule does have the advantage that no-one is an unwilling seller.

The NSW Minister for Fair Trading has released two draft bills for final consultation to reform strata living in NSW. Among a wide-ranging list of changes, the proposal sets a lower hurdle of 75% of owners’ acceptance for termination. Note that this is the number of owners, not a vote weighted by the value of the individual apartment. So the owner of the million dollar apartment with the Bondi beach view gets the same vote as the owner of the small apartment at the back of the block overlooking the parking lot.

Will the proposed changes have any impact on the values of apartments in strata schemes? For many investors and owners the proposals offer increased opportunity to participate in development upside. So the likely impact on the values of strata title apartments – especially in older buildings – is positive.

But there will also be losers. People often value their place of residence at considerably more than market value. That is why, even after the sharp rises in Sydney house and apartment prices in recent years, most houses and apartments are not, in fact, on the market. The owners evidently value them above the likely market price. The prospect of a knock on the door and a notice to depart, even on independently established market compensation terms, may be a disincentive to live in a strata apartment. Some owners who thought their position was secure will find out otherwise.

There is no doubt that the changes will enhance efficiency. But equity matters too, especially when you change the rules of the game. Why not, for example, introduce the new lower 75% hurdle in stages over, say, ten years?

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