Property

Opinion: 'I have good news for you: Now is the time to come out of hiding and get stuck in to property investing': Olly Newland

Olly Newland — Fri, 17 Feb 2012 03:36:43 +0000

By Olly Newland

2011 has come and gone - and for many it’s good riddance.

It was a particularly tough year for some. The recession, both local and overseas, seemed to have no end.

Hopefully 2012 will be better for those of us who are investors, or who intend to be investors.

We are still battling the ding-a-lings lenders who don’t seem to have a clue about what they are doing most of the time.

Even worse, we are obliged to endure the stolid hierarchy of bureaucrats at Council level, some of whom should be whipped across the soles of their bare feet until common sense penetrates.

I am proud to say that my team and I have advised and mentored many investors - guiding them along more profitable paths, ironing out problems, re-organising their financial affairs, (whether property related or in general) and sadly, sometimes acting as grief counsellors in difficult situations.

The mood of the property market has definitely turned for the better … starting from late 2011 and continuing now.

Hopefully this will last and even improve further.

Likewise the commercial property market (shops, offices factories etc.) has seen yields falling to new lows as investors seek much better and tax effective returns other than in limp-wristed bank deposits.

Pressure

In previous articles I have outlined a number of reasons the market has improved - such as continuing low interest rates, the leaky homes fiasco, the Christchurch earthquake tragedy and a virtual freeze in new construction - all of which combine to form a veritable witches’ brew of shortages and pressure.

As we know, shortages create demand, and demand drives up prices and rents.

And we should mention here the loopy Government tax changes soon coming into effect where depreciation will be disallowed. On the bright side, for the property investor and landlord, this tax change will push up rents even further, but disenfranchise even more people from ever getting onto the property ladder.

I predicted all these problems many months ago. Even so, it is frustrating to read all about it today, as if the problem had just arisen, with no idea that there was a problem until now.

Renters in race for space in inner city
By James Ihaka NZ Herald
Tuesday Jan 31, 2012

Renters are scrambling for properties in a housing shortage that has deepened in central Auckland and is now rippling out to the suburbs.

Some areas have seen rents rise by up to 28 per cent and more increases are on their way as the first tax bills disallowing depreciation claims hit property owners from April.

Letting agent Lesley Wills, of Ray White, held a viewing at a Mt Eden house at the weekend and got 10 groups hungry to get a lease. …

and

Bidding wars over rental housing
By Michael Dickison NZ Herald
Feb 1, 2012

Auckland tenants say they are trapped in a bidding war in a city choked for rental properties, as consents for new housing hit a 46-year record low.

Desperate house hunters are sending realtors full CVs with photographs before viewings – which they turn up to with applications already filled out – and one renter says he has been up against offers to pay $100 extra a week. …

All these pressures also lead straight into the property market via increased sales and prices. The wheels start to turn once more and the flow-on benefits show up … with even more breathless urgency.

There are those who try to argue that housing is “non-productive” and anyone who has spare cash should put it into “productive assets”.
But what exactly are productive assets?
No one seems to know or, if pressed, can only give the vaguest of answers.

Say what you like, but it is clear housing, whether purchased to live in or as an investment, creates a huge number of employment openings — from carpenters, electricians, steel, glass and concrete workers, to architects, engineers, and so on down the line to everyone else either directly or indirectly.

Moving on, I’d like to bring two more subjects to the fore: 1. Why I would never buy cheap houses in South Auckland, and 2. Property Finders: a plague on the market

Avoid cheap South Auckland housing

By ‘South Auckland’ I also include all areas where there are masses of cheap basic housing, clustered together … whether in Auckland or any other town.

In my younger years, I bought and sold and renovated hundreds of cheap houses in those very areas. It took me a long time to realise that this sort of investment is, in reality, a hiding to nowhere.

Regrettably the property spruikers who currently infest the market (especially now that there is a recovery underway) work to convince the naïve that this sort of cheap housing is the way to endless wealth and freedom.

Let me tell you: It’s the way to sleepless nights, endless rent arrears and constant repairs.

Many, many people come to me with their portfolio choked with these semi-slums and wonder why they are going backwards financially. They’ve bought the myth: If owning two rental properties is good owning ten must be better and twenty better still!

The problem is that cheap housing will never be the path to wealth because of the fact that there is - effectively - a 'cap' on rents and prices when it comes to the bottom end of the market. Working class (in many cases depressed) areas may, at first blush, appear to produce more income per dollar invested - but that is not only short-lived but also short-sighted.

The cheap housing areas rely heavily on social welfare. They have a much higher rate of unemployment than average, have serious cultural problems and can often be hot-bed for corrosive racial tensions. Some areas are a hideout for gangs, and in many cases the houses are cheaply and badly built.

The fact is that it is virtually impossible to push up the value of these properties - let alone rents - because the good but naïve people that live in them simply cannot afford any increases.

Worse still, the biggest rip-off pushed by shameless spruikers is the argument that renovating these likely-to-be slums will create ‘instant wealth’ through an increase in their value.

Unfortunately this 'value', if it exists on paper, is almost always short lived. Under constant bombardment from tenants, in those areas even a ‘done-up’ property almost always reverts back to its original state faster than greased lightening in a hurry … and any notional gain that may have been created rapidly evaporates.

It’s a smoke-and-mirrors exercise in futility.

No doubt tree-hugging, muesli-chewing, sandal-wearing socialists will read this and sigh “tut-tut”, but these are the facts and being squeamish about them will not help.

If you want to make money, keep your sanity, and really get ahead with far less trouble and greater rewards … then keep well away from cheap housing. (I’m serious.)

In other words buy quality, not quantity. It is far better to have one property in a good part of a leafy inner suburb, than end up with a bunch of scruffy boxes, no matter how smooth the sales pitch from an unscrupulous get-rich-quick spruiker.

I should know. I have been through the exercise and have the scars to prove it.

Auckland Property Values Jump
Michael Field stuff.co.nz

Auckland property values have jumped about 10 per cent in the past two to four years, according to an Auckland Council formula used to set rates.

The council released the new figures, which set the total capital value of Auckland’s 516,000 properties at $354 billion, with 86 per cent of them classified as residential. what has been the largest revaluation ever undertaken in New Zealand, the council has brought all the properties in the combined super city under the one indicative value.

Individual property owners will receive their council valuation at the end of the month and can challenge it as it is used to set the annual rates.

The biggest jumps are in the central city suburbs. Grey Lynn property values are up on 2008 valuations by 18 per cent, followed by Pt Chevalier and Sandringham (13 per cent), Ellerslie, Epsom and Mt Eden (10 per cent). …

Avoid Property Finders

Now that the market is improving, that other form of spruiker has re–emerged from under the rocks. They are the parasitic ‘property finders’.

It comes as no surprise then that some call themselves anything other than property finders - such as ‘property educators’ or ‘property coaches’ often wrapped up with ‘free evenings’ to ‘learn the secrets’ of the property market.

Phooey! These free evenings and the ‘secrets’ are but shameless fronts for selling their own properties, or those of their friendly real estate agent or investor mates, with to be expected kick-backs for any successful sales made.

How do they work? Their modus operandi is similar each time. Firstly, they locate (or are fed, more likely) cheap properties (no matter how crummy) and put in an offer to buy it. In reality, they have absolutely no intention of ever actually purchasing the property - but only seek an option - using a conditional clause to ‘tie up’ the property for as long as possible .

In other words, they put into their contract to purchase some sort of soft conditional clause (due diligence, finance, partner’s approval etc.) for as long a period as they can get away with – often weeks.

Such innocuous clauses together with sweet whispers of assurance - aided and abetted by an amoral real estate agent - lull the hapless vendors into thinking that their property has been ‘as good as sold’ and they can start packing right away.

What happens, of course is the ‘purchaser’/finder then emails out the details to his or her database of ‘investors’ together with a questionable (or indeed often verbal) valuation and rental assessment - plus a substantial profit margin added for themselves in an effort to on-sell the deal. The aim is to have a contemporaneous settlement so as to pick up the difference.

Other methods include ‘novation’ (watch out for that word) where the contract is passed to the hapless end-buyer by way of assignment of the whole contract with no come-back to the ‘finder’ if something goes wrong. You can see this on the Sale & Purchase contract itself when the finder ‘buys’ the property in his name “or nominee” or as “trustee”. Keep well away from these dubious deals is my advice - or risk losing your shirt.

If another buyer isn’t found before the deadline, the finder drops the deal leaving a bewildered, frustrated vendor with the moving truck at the door with its motor running.

Once upon a time there were genuine ‘property finders’ (and occasionally I was one of them). The big difference being that we were always open about what we were doing and always settled the property we had under contract - i.e. bought it - if we failed to on-sell in time.

This ‘property finder’ practice is now so bad, there are moves afoot to ban it all together or insist that such finders become licensed real estate agents themselves - which would effectively stop the whole practice under the new and tougher real estate rules.

And about time too.

There are variations on this practice sometimes called ‘sandwich’ deals or ‘flicking’ or ‘flipping’ or similar … but they all have the same idea in mind: To make a fast buck in between one genuine seller and one genuine buyer with no skin in the table whatsoever.

As I write this, there are fresh efforts to quell this questionable practice:

Property finders in regulator’s sights
Wednesday February 08, 2012 National Business Review

The Real Estate Agents Authority is extending its overview of the real estate industry to include property finders.

Martin Sawyers, legal counsel for the Real Estate Agents Authority told NBR NZPI that the renewed focus comes after an unsuccessful High Court action by Home Buyers.

Mr Sawyers said property finders and the companies and agents that work with them will come under the authority’s spotlight this year and may face legal action.

Home Buyers principal Francisca Forster and her company Home Buyers were prosecuted for carrying out real estate agency work without a license. …

The Outlook

The year has started well by all accounts and I am hopeful that it will last. The past three or four years have been a very difficult for many. Now we seem to be turning the corner and looking forward to a brighter future.

Property investors, whether they be beginners or old-timers, should be congratulated and encouraged to continue the good work.

If you have been hiding under the bed clothes for the past few years sure that the world was coming to an end, I have some good news for you: It is not coming to an end. Quite the contrary in fact. Which means one thing: NOW is the time to come out of hiding and get stuck in.

The property investment market waits for no one and the current statistics already underline the fact. The coming improvement in prices, rents and profits will likely escalate very rapidly to make up time and consequently leaving behind the fearful and the timid.

Make sure this doesn’t apply to you.

---------------------------

Olly Newland
February 2012 www.ollynewland.co.nz Used with permission.

Bernard Hickey sees a massive opportunity in two of our most intractable problems. How do you see it?

Bernard Hickey — Thu, 16 Feb 2012 23:50:32 +0000

By Bernard Hickey

New Zealand faces two crises and one big opportunity that governments in Wellington and Auckland seem either ignorant of or unwilling to address.

The first crisis is of housing supply in two specific parts of the country.

Auckland and Christchurch now have massive shortages of waterproof and undamaged homes that regular families can afford to own.

The problem is set to get much, much worse in the years to come given the lack of new building happening right now and the population increase projected for New Zealand, and for Auckland in particular.

The Department of Building and Housing forecast this month that New Zealand needs to build around 20,000 to 23,000 housing units a year over the next five years to keep pace with population growth. Meanwhile New Zealand has been building at a rate below 15,000 a year for the last three years.

It could be argued this also ignores the destruction or degradation of large swathes of housing stock in Auckland and Christchurch because of the leaky building disaster and the earthquakes of 2011 respectively.

Auckland itself needs at least 10,000 new homes built each year, yet less than half of these are being built.

The crisis has intensified since 1999 with the introduction of the Metropolitan Urban Limit and the revelations that an entire generation of homes is leaky and will have to be either reclad or rebuilt.

Yet the lack of intensity and debate within New Zealand's political leadership is astonishing.

John Key has focused the government this year on selling up to half of the shares in the state-owned power generators to avoid borrowing more money. The government has virtually ignored the strong analysis and recommendations late last year from its own Productivity Commission on New Zealand's housing affordability problems, which are mostly about a lack of new house building. The Department of Building and Housing's advice to the incoming minister made no public impact. See Alex Tarrant's article here.

Even Auckland Mayor Len Brown seems to be focused on other things, in particular a rail loop. He seems more interested in the underlying infrastructure for the very, very long term than the immediate crisis of a lack of housing.

This crisis is playing out in a variety of ways.

There is, of course, a rise in homeless numbers. But the more obvious increase is simply in the price of homes and rents. Both are rising quicker than the wider inflation rate and price rises outside of Auckland and Christchurch. There is an inevitable reaction to this, which is for young Auckland and Christchurch workers and families, those who are not property owners, to simply give up.

They are leaving the country. Last year there was a record exodus of young New Zealanders to Australia, where at least there are much higher paying jobs with many more choices for home ownership, even if affordability in the likes of central Sydney and Melbourne is also impossible for those on anything like median incomes.

The second crisis is youth unemployment.

Statistics out this month show New Zealand has 83,000 15-24 year olds who are not working or are not in education. The youth unemployment rates for Maori and Pacific Island youth, mostly in Auckland, is simply scandalous at 30.4% and 29.8% respectively. These are Greek and Spanish-type levels. Yet, again, we hear nothing from likes of Key or Brown. There seems little sense of urgency or leadership.

Leaders are supposed to identify and articulate the problems before calling for solutions. We have yet to hear our leaders even acknowledge the problem.

That brings us to a massive opportunity. Why can't New Zealand as a nation take a strategic decision to solve these two crises by training these 83,000 young people as plumbers, chippies, electricians, roofers and the like in preparation for a national scale building programme?

Why can't our governments, both central and local, provide some leadership to fix these problems?

It would be tough.

Government-owned land would need to be opened up and town planners over-ruled. Taxpayer money would need to be invested and lots of it. All these kids would need to be trained.

But is anyone even talking about it, let along doing it?

The problem cannot simply be ignored. Expressed another way that property-owning politicians might identify more with, here's an example of what's wrong with these property markets.

A basic three bedroom 1980s-style family house on flat land was sold in the Grammar zone in Epsom this week after a bidding frenzy of over 400 bids by 90 people. It had a government valuation of NZ$770,000 and was expected to sell for around NZ$900,000.

Instead it sold for NZ$1.339 million or 34 times the median salary for workers in Auckland.

An out of cycle hike to floating mortgage rates is 'not on our horizon', says ASB boss Barbara Chapman

Gareth Vaughan — Wed, 15 Feb 2012 01:53:50 +0000

By Gareth Vaughan

ASB chief executive Barbara Chapman says her bank has no out of cycle hike to floating mortgage rates planned despite its parent Commonwealth Bank of Australia (CBA) joining other Australian banks in one over the past week and suggestions from her counterpart at BNZ that New Zealand banks may tread the same path.

Led by the ANZ Banking Group several Australian banks - blaming an increase in their own funding costs - have increased their floating, or variable, mortgages rates in the last few days despite the Reserve Bank of Australia leaving the Official Cash Rate (OCR) unchanged at 4.25% at its most recent monthly rate review. Yesterday new CBA chief executive Ian Narev said the bank had been writing home loans at a loss prior to Monday's 10 basis points hike that took its floating mortgage rate to 7.41%. ASB's floating home loan rate is 5.75%. See all advertised bank home loan rates here.

BNZ chief executive Andrew Thorburn has told interest.co.nz this type of out of cycle hike could also occur in New Zealand. Subsequent to Thorburn's comments BNZ did hike its key floating mortgage rate by 15 basis points to 5.74%, although this largely brought it in line with its rivals. Here the OCR is 2.5% and many economists don't expect it to be hiked before 2013.

But asked whether an out of cycle floating rate hike was likely in New Zealand this year Chapman said: "It’s certainly not on our horizon. What the other banks do I won’t predict but we’re comfortable with where we are at the moment and have got no plans to do that."

Although the banks have recently been cutting fixed-term home loan rates, floating rates are more significant at the moment given 61% of home loans by value are floating, the most since the Reserve Bank started measuring the data in June 1998. Overall NZ$143.993 billion, or 84%, worth of banks' on-balance sheet residential mortgages are either floating or up for renewal during 2012. According to the Reserve Bank's figures, the trading banks hold just NZ$281 million worth of residential mortgages off-balance sheet.

As of December 31, ASB had 63% of its home loan portfolio on floating rates, up from 59% at June 30 last year. Of its business loans, 87% were on floating rates, up from 86%.

ASB's profit improves on all measures

Chapman was speaking after ASB yesterday posted record half-year net profit of NZ$372 million. That's up NZ$89 million, or 31%, from last year's NZ$283 million, the previous record high. ASB's other key profitability measures all also showed strong increases.

Return on shareholders' equity rose to 21.2% from 17.2% in the June 2011 year, return on total average assets rose to 1.2% from 0.9%, net interest margins rose 11 basis points to 2.19%, and total operating expenses as a percentage of total operating income fell to 40% from 44.9%. Ordinary dividends were lifted to NZ$340 million from NZ$80 million in the six months to December 2010.

CBA said the interest spread, the difference between the average interest rate earned and the average interest rate paid on funds, from its New Zealand operations rose 11 basis points to 1.78%. It also said the effective tax rate across its New Zealand operations was 23.9% versus the 28% corporate tax rate. ASB itself paid NZ$138 million of tax on NZ$510 million net profit before tax, a rate of 27%.

From here Chapman said she expected ASB's net interest margins to be "pretty stable."

"You’ve got to remember that margins fell just prior to the global crisis so what we’re seeing now is a return to a more normal and sustainable margin. I think where the margins are at now is more aligned with the long-term trend so I think they’ll stay pretty much like they are."

'Interesting' decoupling move in Australia

Although not predicting an out of cycle hike to floating mortgage rates, Chapman reiterated comments from the likes of Thorburn and Australian bank bosses that the OCR is only one input into the mix of funding costs banks face, alongside the likes of deposit rates and wholesale borrowing rates they pay. In Australia ANZ recently moved to review housing and small business floating interest rates monthly, on the second Friday of the month, independent of the Reserve Bank of Australia's OCR announcements, which fall on the first Tuesday of every month.

Chapman said this was an interesting move.

"I’m not saying we’re going to decouple like they have, but it’s certainly an interesting twist to the market I believe," said Chapman.

As for another recent development in Australia, with both ANZ and Westpac announcing major job cuts, there were "no plans to do that" at ASB.

'Some very high quality customers' with above 90% LVR home loans

Meanwhile, Chapman said the recent increase in ASB's home loans with loan to value ratios (LVRs) above 90% was something the bank was watching closely. According to its most recent general disclosure statement, ASB had NZ$3.4 billion worth of home loans at LVRs above 90% at September 30 last year, 8.1% of its total residential mortgages. That's up from NZ$1.6 billion, or 3.8% of its lending, a year earlier.

"It’s obviously a part of the book that we watch quite closely," said Chapman.

"It is an area of the market where there are some very high quality customers, particularly that first home buyers market, so we’ve got offers in place now and customers definitely are coming to us for that kind of business,' she added. "I’m comfortable with where it is, we keep a really close eye on it as you can imagine."

ASB grew lending in the half year by NZ$128 million, or 0.2% to NZ$52.641 billion. It grew deposits by NZ$2.6 billion, or 4.6%, to NZ$58.2 billion continuing a trend since the second-half of 2009 that has seen the country's big banks able to self fund given their increase in retail deposit funding has been greater than their increase in lending.

Nonetheless Chapman said ASB was still exposed to overseas wholesale funding markets with debt maturities to cover.

"They (offshore wholesale funding markets) are certainly a cloud on the horizon. There’s no doubt that those funding pressures are intense and we just need to make sure we get as much local deposit as we can to protect the cost to our customers,"said Chapman. "We’re in pretty good shape at the moment. We’re certainly able to grow our balance sheet from the funding that we’ve got. So we’re looking to do that."

CBA released figures showing the group is 62% funded through customer deposits, with 19% of its funding coming from short-term wholesale loans and another 19% from long-term wholesale sources.

Growth in lending to dairy farmers; Digital & mobile moves afoot

Although at 0.2% the bank's lending growth was anaemic, it marked a turnaround from a 1.2% contraction in the June 2011 year. Chapman attributed this improvement to ASB remaining competitive.

"We haven’t had the sharpest rates in the market but the service offering here is strong," she said. "We’re number one for customer satisfaction in New Zealand (she cited an AC Nielsen survey placing ASB first among the big five banks in December, TSB Bank continues to have the highest customer satisfaction overall) at the moment. Those sorts of things drive opportunity for us."

Most of the lending growth was coming in the business market, Chapman added. CBA figures show ASB's share of business lending up to 9.3% from 9.2% and home loan share down to 22% from 22.1%. Chapman said there was "good growth" in ASB's lending to farmers, especially dairy farmers, where she expected the bank's market share to grow.

Meanwhile, another focus was innovation and technology. Asked what were the key areas she said: "I think you should watch the digital and mobile space."

(Update clarifies ASB as having the highest customer satisfaction among the big five banks with TSB still top overall).

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Treasury decision to admit Equitable Mortgages to Crown guarantee scheme against RBNZ advice likely to cost taxpayers' at least NZ$43.4 mln

Gareth Vaughan — Thu, 16 Feb 2012 03:18:26 +0000

Treasury’s decision to admit property lender Equitable Mortgages, now under investigation by the Financial Markets Authority (FMA), into the Crown retail deposit guarantee seems set to cost taxpayers' around NZ$40 million.

The third report from receiver Grant Graham of KordaMentha predicts up to 70%, or NZ$134.6 million, of the NZ$192.3 million (NZ$178 million was guaranteed by the Crown) of principal owed to about 6,000 secured debentureholders when Equitable was placed in receivership on November 29, 2010 will be recovered.

Graham says KordaMentha has thus far repaid NZ$50 million to investors and the Crown and says loan recoveries – Equitable had loans of NZ$188.4 million outstanding at the date of receivership – might enable him to repay between 65% and 70%, or NZ$124.9 million and NZ$134.6 million of the total owed to investors on the date of receivership.

Treasury says it has paid out about NZ$170 million to some 3,700 Equitable depositors, representing about 97% of depositors and amounts owing. That leaves taxpayers’ at least NZ$43.4 million short, based on the top end of the receiver's expected recovery range and the amount guaranteed by the Crown. At the low end of the range, taxpayers' would be NZ$53.1 million short.

Receivers were appointed to Equitable Mortgages after the company's management told Treasury it no longer had a viable business given the tough economic climate and it would struggle to meet new Reserve Bank capital requirements.

Auditor General Lyn Provost's audit report on the implementation and management of the Crown retail deposit guarantee scheme, released last October, revealed that Treasury let Equitable Mortgages into the scheme despite the Reserve Bank's view that the property lender, which ultimately failed whilst holding about NZ$178 million in Crown guaranteed deposits, wasn't eligible because it primarily provided financial services to a related party.

Equitable Mortgages was part of the Equitable Group controlled by the rich lister Spencer family headed by Chris Spencer.

Provost's report says the Reserve Bank's view was Equitable Mortgages wasn't eligible for the scheme because it primarily invested in the Equitable Property Mortgage Fund, an investment fund governed by a trust deed formed in 2007 to hold most of the Equitable Group's mortgages. It was managed by Equitable Property Finance, another arm of the Equitable Group. The Fund invested in loans secured by first mortgages over commercial, industrial and residential properties.

"It was the Reserve Bank's view that Equitable Mortgages was providing financial services to a related party, which was contrary to one of the main eligibility criteria in the policy guidelines (which set out the criteria considered by Treasury when assessing applications)," says Provost.

"However, the Treasury took a broader view and determined that, because of the trust arrangement and the nature of the transactions, the recommendation of ineligibility from the Reserve Bank was not persuasive. The Treasury concluded that it was in the public interest for a guarantee to be granted, so the application was approved on December 4, 2008."

Meanwhile Graham notes that an insurance company related to Equitable provides potential for the recovery of money not included in his estimate.

“A company related to Equitable Mortgages, Equitable General Insurance (EGI), issued loan loss cover policies in respect of Equitable Mortgages advances," says Graham.

“We are assessing the claim that can be made under these policies and discussing with EGI its ability to meet these claims, which we expect will significantly exceed EGI’s reserves. Our recovery estimate does not allow for any recovery from these policies.”

Nonetheless he says he expects there to be a shortfall owing to investors and the Crown.

Equitable is one of several failed finance companies still being probed by the FMA.

(Update clarifies potential shortfall to taxpayer is between NZ$43.4 million and NZ$53.1 million, not around NZ$30 million).

Janine Starks looks at the various shades of grey in a green-blue zoning conundrum and sees nothing but red-tape and trouble.

Janine Starks — Tue, 14 Feb 2012 20:06:45 +0000

By Janine Starks*

From my mail bag

Dear Janine,

We own a home on ‘TC3’ land (the new green-blue zone), but we are not sure if our house is a repair or a rebuild.

The street fills with liquefaction with each big shake. We don’t have liquefaction on our lawn, but you don’t have to dig very deep to find the silt, so we put in a land claim.

We want to sell up and get out, but I’m getting increasingly worried that no one will buy our house if it only gets repaired. What difficulties do you think we face in selling the house? We have a large mortgage and don’t know how long we’ll be waiting for things to get sorted.

Green-blue trapped

This is a really tough one. The ability to sell a home on green-blue land (Technical Category 3 or ‘TC3’) could be very difficult. It all hinges on the actions of a number of groups of professionals; EQC, insurers, bankers, real-estate agents and lawyers. They all have the potential to increase the barriers to a sale.

The ‘TC3’ label could cause problems across the board, for re-selling. While the category only applies to houses with foundation damage, this is a bit of a farce. Even if you have no damage, your land may suffer “moderate to significant liquefaction” in a new event. That has got to be a big red flag to future buyers. The resale issue is not going to be isolated to the hard-hit areas, when we face a decade of seismic activity.

I hear so many people say “I’m on TC3 land, but we’re really lucky our foundations are fine.” I think that’s misguided. It is possible that a good number of TC3 home owners will end up worse off financially than those in the Red Zones – especially those who are not getting new foundations. The erosion of equity is a real risk.

Here's my thoughts on how the professions involved could impact the situation:

1. EQC:

While some TC3 landowners are pushing to become red-zoned, it’s questionable how wide the government’s purse will extend. An alternative could be another array of sub-categories within TC3. This is just a guess at how they might handle it, but it would classify some TC3 land as being sturdier and some as more dodgie. Those at the worst end of the scale could have their land written off as it’s too difficult or uneconomic to remediate. In effect, we’d have patches of red-zone by another name (minus any government offer on the house).

Under the legislation, EQC can make a payout equivalent to the value of a 450 metre section. Money wise, that’s quite different to the Red Zone offer of Rateable Value. The double whammy is if your home is repairable – insurers will just patch it up, leaving you with a land payout but no house payout.

It’s questionable what buyers will pay for a repaired home sitting on old style foundations on liquefaction-prone land which has not been remediated, or the land has been written-off.

Right now the only people getting individual geotechnical reports are those with damaged foundations. If your foundation survived and no geotech is carried out, the ostrich mentality can prevail – we can all just pretend there has been no destruction in value. In my view this still creates a web of problems for insurers, bankers, estate-agents and lawyers, when it comes to the home-owner selling (see below).

To top it off, there was a subtle suggestion recently that the government should review their role in providing land cover via EQC. If this was removed across New Zealand, it might seem like we are all in the same boat. However, those on TC3 land are in a much wobblier boat, with wobblier valuation outcomes if the reassurance of land protection is thrown overboard.

Does the government care?

There might be an uncomfortable uproar at some residents getting land offers at the Rateable Value, some getting 450 metre payouts, and others being totally ignored and suffering the market forces of a reduced valuation. But the Government has never been too bothered about inequitable outcomes.

Look at the leaky home debacle or the way South Canterbury investors were bailed out when vast numbers of others had to suck up the losses. Consider AMI policy holders versus Ansvar customers who have no earthquake cover beyond the EQC limit. Life isn’t fair, but gosh it would be nice to be wrong.

2. Insurers

If EQC writes off pockets of TC3 land, homeowners will look to their insurers to rebuild or buy elsewhere. The outcome is a good one – they can run far from the green-blue mud, albeit miffed that their land payout wasn’t as high as Red-Zoners.

But if the land is written off and the home is found to be repairable, will insurers come to the party and write off the house? I have it on good authority that they won’t. They will only carry out a repair. While Red-Zoners with repairable homes had the governments cash-offer to fall back on, Green-bluers would not. They would need to mount a legal challenge against their insurer and argue that the land condition renders the home a total loss and the house must be removed to allow remediation or written off. Insurers will chuckle at the cheek of the suggestion, but I’m not sure they’re on as steady ground as they think. The Red-Zone situation only went unchallenged due to the governments back-up offer.

Buyers of homes in all TC3 locations must contemplate a number of insurance issues:

Will insurers continue to let them pass their insurance contracts onto another new buyer in future?
Will they ever be able to increase their cover if they want to extend the home?
Will TC3 areas suffer larger increases in their excesses than other locations?
Will EQC land cover remain in place?

3. Bankers

Buyers need to negotiate mortgages and banks need to be happy with the quality of the security (liquefaction prone land and homes without foundations to withstand the risks). Banks will have to weigh up the chance of insurance levels sliding over the term of the loan and will want large deposits (so it’s the buyer’s money at risk, not theirs). I suspect there are conversations going on in banks right now about the sensibility of allowing loans on TC3 land – if they aren’t, they’re asleep at the wheel.

4. Real-estate agents

A quick drive around the Green-blue areas uncovers a good smattering of ‘For Sale’ signs and the odd new ‘Sold’ sticker. It’s difficult to believe properties on TC3 land are being actively marketed at the moment and it makes you wonder what warnings agents are giving to buyers. While they represent the seller there is surely some duty of care owed.

Hopefully the Real Estate Institute is pondering the legal ramifications of agents selling assets with “moderate to significant” risks. It could be a future misselling scandal given the situation is unusual and buyers are not used to analysing this type of market anomaly. Agents should think about covering their rears and document the risks to buyers.

5. Lawyers

Unlike agents, lawyers do represent the buyer. A good lawyer will go through the risks of buying a home on TC3 land. If they have any sense they’ll also ask their client to sign a legal disclaimer to prove they were made aware of these risks.

The waiting game

In terms of how long it could take to work through the issues, rumour has it that the queue to get land assessments from EQC could be up to two years and rebuild queues could be up to four years. Everyone can’t be first, so my guess is that total wait times will be in the two-five year range. Priority will go to those not able to live in their homes. Repairs will be quicker, but insurers are running risk-models and won’t start these until seismic activity settles.

Consider the emotional impact of the wait. Some people need to leave in order to keep their lives moving – new babies require extra bedrooms and those who want to retire might wish to live closer to family. Whatever the reason, if your home is still livable, consider renting it out and renting the type of home you need in the right location. Your finances might have to sit in limbo, but don’t assume your life must. Sometimes you must try and stick to your plans to stay sane.

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Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt. Anonymity is guaranteed.

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*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.