Trends related to the new home warranty program

Trends related to the new home warranty program

To identify key trends, I reviewed the claims, warranty cost, and builder registration trends of the past five years to obtain a broader understanding of the new home warranty program. I have relied on claims data provided by Tarion, whose staff have been prompt and professional in responding to my requests.

The key trends for the past five years are:

• total number of new homes registered under warranty remains consistent
• the enrollment fee for homeowners has decreased, caused in part by builders being accountable for MSD claims
• the average number of claims, conciliation inspections, and Licence Appeal Tribunal (LAT) decisions have remained consistent
• the dollar amount of claims has increased by 68% (2012-2015)
• freehold units have the largest number of claim items paid and the largest share of compensation paid out
• the number of homes with a claim paid out is less than the number of vendor/builders issued a chargeable conciliation

Ontario has consistently had the greatest number of housing starts in Canada over the last five years ^{footnote 1[1]}. In the same period, the number of housing starts in Ontario and the number of new homes enrolled under the warranty plan remained relatively consistent. In 2015, the number of new homes enrolled in the warranty plan was approximately 58,000.

Meanwhile, the average enrollment fee for a new home has decreased for all dwelling types: 5% decrease for freehold homes, 8% decrease for low rise condominiums, and 14% decrease for high rise condominiums. Tarion explained that the decrease in average enrolment fees is related to the reversal of a surcharge for major structural defect risk, which occurred once the new Major Structural Defect (MSD) policy was passed in 2012. The new policy puts more accountability on builders and increased Tarion’s ability to recover losses from builders related to MSD claims (Refer to Charts A and B in Appendix D for additional details).

In summary, the percentage of claims, conciliation requests, conciliation inspections, and LAT decisions in proportion to new homes under warranty has remained fairly consistent year over year since 2011. There has been a slight increase in the number of conciliation requests and conciliation inspections. Less than 1% of cases are appealed to the Licence Appeal Tribunal (LAT). In 2015, 82 cases were appealed to LAT (Refer to Table 1 in Appendix D for additional details).

However the total dollar amount of claims paid has increased by approximately 68% from 2012 to 2015. Tarion noted that from the year 2000 there has been general volatility in claims paid year over year. In particular, in the years following the 2008 economic recession, including 2012, claim payments were lower than normal. This was due to a slowdown in construction activity, especially high rise projects, many of which were put on hold during the recession. This resulted in a lower number of possessions and claims during the period.

In contrast, following 2012, the total number of claims paid out gradually increased due to a higher number of MSD claims being submitted. Specifically, these claims included 19 soil settlement cases, 17 radon cases, and 10 septic system cases.

From 2012 to 2015, four claim types – Material & Workmanship, MSD , Deposit Refunds and Water Penetration – made up more than 80% of the total claims paid out in each year. Of these, 45% of the claims were first year warranty claims regarding material and workmanship.

It should be noted that although materials and workmanship continue to be the most common claims from 2012 to 2015, MSD and deposit refunds represented an increasing share of claims, increasing by 160% and 183%, respectively. Tarion advised that the percentage increase in MSD claims is a reflection of a lower than average claims amount in 2012, as previously noted.

The increase in deposit refunds is a result of three large freehold developments where the builder was unwilling/unable to resolve the claims. This resulted in a number of consumers being affected and multiple claims over several years (Refer to Chart C in Appendix D for additional details).

Freehold units have the largest number of claim items paid (1,958 claim items were paid for 513 homes in 2015) and the largest share of compensation paid out ($7,534,691 paid out in 2015)^{footnote 2[2]} (Refer to Charts D and E in Appendix D for additional details).

On an annual basis from 2011 to 2015, the number of vendor/builders issued chargeable conciliations accounted for 49% of total claims paid out. Tarion attributed most of this variance to circumstances where the claim met one or more of the exceptions to chargeability in accordance with Builder Bulletin 20 How Chargeability is Defined and Applied. Chargeable conciliation and its exceptions are explained in detail later in this report (Refer to Chart F in Appendix D for additional details).