EQC quake liabilities more than double to NZ$7.1 bln, up by NZ$4 bln; Finance Minister Bill English still eyes 2014/15 govt surplus

EQC quake liabilities more than double to NZ$7.1 bln, up by NZ$4 bln; Finance Minister Bill English still eyes 2014/15 govt surplus

By Alex Tarrant and Gareth Vaughan

The Earthquake Commission (EQC) has hiked its estimated liability from the Christchurch earthquakes by NZ$4 billion to NZ$7.1 billion.

This would mean the government would be required to honour its guarantee of EQC's disaster fund, which had about NZ$6 billion of assets before the Christchurch earthquakes on September 4, February 22 and June 13.

Credit rating agency Statandard & Poor's said the announcement would not alter the EQC's rating, as the disaster fund was backed by the government. S&P said it was working through the implications of the revised estimates on the Crown’s operating balance and projected debt profile, and had nothing to add to its previous comments on New Zealand’s credit quality. 

"The ratings on New Zealand reflect our opinion of the country's fiscal and monetary policy flexibility, strong institutions, economic resilience, and actively traded currency. New Zealand's credit quality is weakened by its high external liabilities, despite some deleveraging in recent years," S&P said (see full release below).

New estimates

Finance Minister Bill English says the new estimate follows an actuarial valuation of EQC's liability, based on available field assessments of damage claims. It includes an increase of NZ$2.17 billion from the February 22 earthquake and NZ$1.42 billion from the June 13 earthquakes and other aftershocks, which were not previously included.

Despite the increased liability, which English said would have a one-off impact on the government's 2010/11 operating balance, he said the government was still on track to return to surplus in the 2014/15 year and to keep net debt below 30% of Gross Domestic Product (GDP). EQC would meet most of the increased costs through its Natural Disaster Fund with the government meeting the shortfall.

The 2010/11 Crown accounts, due out in October, will show an operating deficit before gains and losses up to about NZ$18 billion, which is NZ$1.3 billion higher than the initial Budget forecast.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," English said. "Today's announcement will not affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch."

"EQC can meet most of these costs through the Natural Disaster Fund, which held about $6 billion before the first earthquake. The Government, through its guarantee under the Earthquake Commission Act, will meet any shortfall. EQC also has reinsurance in place to help meet the cost of any future events."

"Despite the increased liability, which will have a one-off impact on the Government's operating balance for the 2010/11 year, the Government remains on track to meet Budget forecasts of a return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP," Mr English says.

He added that the latest figures remained estimates and said EQC and the Treasury would continue to periodically revise the expected liability as more claims are completed and more information becomes available.

Meanwhile, Earthquake Recovery Minister Gerry Brownlee said the Canterbury and Christchurch earthquakes were likely to rank globally as the fourth most costly for insurers since 1970.

Above and beyond

EQC was liable for the first NZ$1.5 billion in costs from the September 4 and February 22 earthquakes, and had reinsurance of an extra NZ$2.5 billion in place for both, meaning it had NZ$4 billion in costs covered for each event. However with costs rising above that NZ$4 billion mark, EQC has to dip into its fund for those extra costs - something it did not initially expect to have to do.

The higher than expected costs from the February 22 quake, as well as costs from the June 13 quake, mean EQC will have to clean out its NZ$6 billion in reserves, when before it was expected to have about half that left over once Christchurch costs had been paid.

We had been doing better

At a press conference in the Beehive, English said the government’s budget for the year to June 2011 had run better than expected, and was on-track for a deficit before gains and losses of NZ$14 billion, down from an initial estimate of NZ$16.7 billion.

This was due to a higher than expected tax take, and lower than forecast government expenditure. But the revised quake costs would push this out to NZ$18 billion, as the increased cost to EQC would have to be taken into account.

The re-estimates underlined the vulnerability New Zealand had economically-wise.

“We have reasonably fast rising government debt, which we’re getting on top of; We’ve got high levels of overseas debt, and this is an extra cost we’re going to have to carry. So it makes us a bit more vulnerable today than we were before we knew this number,” English said.

Any questions on New Zealand’s credit rating and costs of borrowing were best directed at the ratings againcies.

“You weigh it up don’t you – on the one hand it’s a one-off, on the other hand it is a bit of a set-back when we were making significant progress,” he said.

'Won't affect EQC payouts'

Brownlee said the announcement would not affect Canterbury homeowners in line for a payout from the EQC.

It is now estimated 30,000 houses will have damage greater than NZ$100,000 in damage – the amount covered by EQC for residential buildings. That is up from an initial estimate of 12,000 houses.

“Today’s announcement will in fact confirm for homeowners what many already knew – that the damage they thought they saw after the earthquakes proves to be much greater when the full assessment is completed by EQC,” Brownlee said.

Disaster fund to zero

English said that as a result of this estimate, the EQC’s natural disaster fund would fall to zero as financial assets were sold off to cover the increased future liabilities.

That would mean the Crown would have to cover costs of further disasters. EQC would still have its existing reinsurance contracts, although arrangements would become more complex over the next twelve months.

“There’s further reinsurance, but any further EQC liability would then be picked up directly by the Crown because the natural disaster fund is likely to disappear,” English said.

The government would focus first on meeting the EQC’s existing liabilities as quickly as possible, before perhaps looking at ways to replenish the fund. English would not rule out higher EQC levies, or some sort of taxpayer levy to help top up the fund - a policy pushed for by the Green Party following the February 22 earthquake.

UPDATE: A spokeman for English has clarified that the government was not putting the Green Party proposal back on the table, and English's comments were only specific to the possibility EQC insurance levies may rise.

Following the announcement from English and Brownlee, Green Party co-leader Russel Norman said the figures showed the government needed to consider a temporary taxpayer earthquake levy. See details on the Green Party's proposal here.

“A small temporary earthquake levy is the fairest way to pay for the rebuilding of Christchurch. The Key Government has previously rejected the idea of a levy stating we had the funds to cover our liabilities," Norman said in a press release.

“Now it turns out the Government was wrong by four billion dollars. It is poor economic management to have not managed the Government’s finances in a way that can absorb these kinds of shocks. It’s now time to investigate a temporary levy on income," he said.

“New Zealanders have indicated they are prepared to fund a levy as the fairest way to share the costs of the earthquake. Ignoring this option in favour of more debt is bad economic management. Residents of Christchurch have already been hit with rates rises and will be exempt from this levy."

Worse than expected

English said he expected councils and private insurers to also have been reassessing costs like the Crown had done. AMI, the insurance company which may need up to NZ$1 billion worth of government backing earlier in the year after indicating it might not meet all of its claims, would be doing its own estimates and reporting back to the government.

“This is a re-estimate just on EQC’s liability, it’s an indication that, in general, the February quake in particular caused more damage than was previously thought,” he said.

“As all the insurers work through their individual assessments, that will probably become apparent, including in AMI’s case."

The government announced in April it would back Christchurch-based AMI if the company’s reserves were not big enough to cover claims.

Will reinsurers touch us now?

Brownlee was optimistic the reinsurance industry would not turn its back on New Zealand following these revisions. He is heading to a major global reinsurance event in Europe in September.

“They know what they’re exposures are because they’re contracted in. So those companies that are reinsuring private insurers already I think will understand from their private insurance clients that the size of the residential damage is bigger than first assessed," Brownlee told the media conference in the Beehive.

"But really what the message we’re taking is, if you look at insurance as a risk-based industry, the way it becomes profitable is if you de-risk. Everything the government is doing is about trying to de-risk the earthquake damage that could occur in the future," Brownlee said.

"We do know a lot about the seismology of the land in Christchurch, we will know from that the sort of treatment we will need to give to foundations of buildings and building codes going forward; We’ve decided that some land is not suitable for immediate re-building, and may not be for many years to come – so we’ve done that buy-out exercise," he said.

“New houses will be built on stronger land to higher codes, further de-risking. Then I think it’s a matter of them understanding that we do have a dynamic economy that still operates in Canterbury – it’s a NZ$27-30 billion economy, which is showing good signs of staying stable. So the long-term prospects for a risk-based business in Canterbury are better than perhaps some might initially think.”

EQC had reinsurance contracts in place, as would private insurance companies, Brownlee said.. Government had received advice that reinsurance was still available, although price would be an issue.

“It’s how those contracts are shaped up in the future that’s important. So letting the international reinsurers understand how much we’re de-risking earthquake-type events, not only in Canterbury but also throughout New Zealand in the years ahead, is going to be very, very important for being able to secure future contracts,” Brownlee said.

“I don’t think you could take this as being an absolute determinant that reinsurers will desert. Every indication we’ve got is that reinsurance remains available, it’s the price that becomes the most important thing, and the price, of course, is determined by the perceived risk going forward,” he said.

“If we look at the way in which your retail insurance policy premium is calculated, somewhere between 15% and 20% of that policy is reinsurance costs. So a doubling of it doesn’t mean a doubling of your premium. It has a price increase obviously.

“We just need to make sure that reinsurers understand that we are very, very keen to firstly quantify thedamage here in New Zealand, to fix it, and to make sure that going forward the reasons for a lot of the failure of buildings, whether it’s land or building failure itself, are understood and mitigated against going forward. That’s good for them. That means that they have a better understanding of their forward risk profile," Brownlee said.

The end of EQC?

The whole episode of Christchurch had highlighted the both the strengths and weaknesses of EQC, English said, with the government going to review the disaster fund when issues in Christchurch died down.

“When the time’s right we would examine whether that’s the right framework to continue with," English said.

“As we brake the back of the situation in Christchurch, we’ll be moving to consider, along with the insurance industry,...whether the EQC framework worked well when it was severely tested. But we’re not going to pre-empt those issues – all I’m saying today is we wouldn’t rule out any consideration, any particular proposition in future,” he said.

See the release from English:

The Earthquake Commission (EQC) has increased its estimated Canterbury earthquakes liability by about $4 billion to $7.1 billion, Finance Minister Bill English says.

The new estimate follows an actuarial valuation of EQC's liability, based on available field assessments of damage claims. It includes an increase of $2.17 billion from the 22 February earthquake and $1.42 billion from the 13 June earthquakes and other aftershocks, which were not previously included.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says. "Today's announcement will not affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch.

"EQC can meet most of these costs through the Natural Disaster Fund, which held about $6 billion before the first earthquake. The Government, through its guarantee under the Earthquake Commission Act, will meet any shortfall. EQC also has reinsurance in place to help meet the cost of any future events.

"Despite the increased liability, which will have a one-off impact on the Government's operating balance for the 2010/11 year, the Government remains on track to meet Budget forecasts of a return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP," Mr English says. 

EQC's initial liability estimates were based on international models for calculating damage from single events. While these hold for the 4 September earthquake, they were not designed to calculate the effects of multiple events.

"Quite clearly the scale of residential damage from the 22 February earthquake has been worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected. 

"For example, it was initially thought 12,000 houses would have more than $100,000 in damage. As EQC has completed more detailed assessments, this number is now estimated to be about 30,000 houses.

"Damage to land was initially estimated at between $300 million and $600 million. This has increased to $1.8 billion."

The new estimated liability will be reflected in the 2010/11 Crown accounts, which will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas.

Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

"We need to remember these are still estimates and EQC and the Treasury will continue to periodically revise the expected liability as more claims are completed and more information becomes available.

"At the time of the Budget, Treasury put the total earthquake damage bill – to all property owners and insurers - at $15 billion, or about 8 per cent of GDP, making it the worst natural disaster in recent memory to hit a developed nation – relative to the size of its economy.

"The Government has asked Treasury to update this estimate based on new information available since the Budget," Mr English says.

And here's Brownlee's release:

Canterbury Earthquake Recovery Minister Gerry Brownlee says Cantabrians affected by the past year’s seismic events and all other New Zealanders should have no concerns about their Earthquake Commission (EQC) claims being settled in full.

His assurance follows today’s announcement that the EQC has revised its estimated Canterbury earthquakes liability upwards by about $4 billion to $7.1 billion. "EQC’s fund is government guaranteed to protect claimants’ interests," Mr Brownlee said.

"Earlier this year EQC renewed its reinsurance, which means the country is adequately covered in the case of further major events.

"EQC contents, building and land claims in Canterbury will continue to progress at pace, as will EQC’s full inspection programme – claims will continue to be paid out."

Since 4 September last year EQC has received more than 388,000 claims for all the earthquakes, one of the highest numbers ever handled by a single insurer in the world. The previous biggest event for EQC was the Gisborne earthquake in 2007 with 6224 claims.

The Canterbury and Christchurch earthquakes are likely to rank globally as the fourth most costly for insurers since 1970 after Northridge, California, in 1994, the 9.0 earthquake and tsunami disaster in Japan in March this year, and Kobe, Japan, in 1995.

Ratings agency Standard & Poor's affirmed EQC's ratings, based on the government's willingness to back it.

Melbourne, Aug. 30, 2011—Standard & Poor’s Ratings Services said today that its ratings on the New Zealand government-owned Earthquake Commission (EQC; AAA/Stable/--) are unchanged following the EQC’s increased estimate of liabilities associated with the earthquakes in the Canterbury region. The ratings on the EQC are equalized with those of the New Zealand government (foreign currency AA+/Negative/A-1+; local currency, AAA/Stable/A-1+), reflecting Standard & Poor’s opinion that there is an ‘almost certain’ likelihood that the New Zealand government would provide timely and sufficient extraordinary support to the EQC in the event of financial stress.

The EQC has increased its estimated exposure to the Canterbury earthquakes by about NZ$4.0 billion to a total of NZ$7.1 billion, net of reinsurance recoveries. The increase follows an updated actuarial valuation, as well as the inclusion of estimated costs for the June 13 event and other aftershocks. We understand these estimates are still subject to change as more information becomes available. While we believe that the EQC’s stand-alone creditworthiness has materially deteriorated, we expect the entity to meet most of the revised costs through its own funds, which were in excess of NZ$6.0 billion prior to the first earthquake. We believe any shortfall will be met by the EQC calling on its government guarantee.

The EQC ratings continue to reflect the ratings on the New Zealand government (local currency). While there is uncertainty as to the future structure and capitalization of the EQC, we believe the EQC will remain very strongly supported by the government. The EQC ratings are capped by the sovereign’s local currency rating, and would therefore be lowered if the local currency ratings on the sovereign were lowered, or if our view on the likelihood of extraordinary government support reduced.

We are working through the implications of these revised estimates on the Crown’s operating balance and projected debt profile, and we do not have anything to add to our previous comments on New Zealand’s credit quality. The ratings on New Zealand reflect our opinion of the country's fiscal and monetary policy flexibility, strong institutions, economic resilience, and actively traded currency. New Zealand's credit quality is weakened by its high external liabilities, despite some deleveraging in recent years.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Ouch, another extra hit to the government's (our) books. Not to worry the government is predicting strong growth in the next few years which will take care of this widening deficit, so nothing to see here, move along......

I detect sarcasm after the 'don't worry' :)

So it's another $700 for every man, woman and child in the country. That's not much...but isn't the underlying problem that we have now spent our protective reserve against any future disaster, the reserves collected over many decades? Reinsurance, if available, is going to cost so much more etc. So the issue we need to address isn't the Budget Deficit, but replenishing the EQC. And where do we think we are going to get that replacement money from; money that protects the assets of property holders?....Property holders, perhaps? After all, it's their assets that 'we' need to insure......or do we just cross our 'quaked fingers...

We need to set up proper systems to monitor and control expenditure to ensure that there is no fraud or waste, and that all recipients are actually entitled to what they receive.

Payments should be made for primary buildings , because we hear of stories of people claiming large sums for run down Garden sheds and other rinky-dink structures on thier properties. 

No fraud or waste?

I reckon half the cost could be attributed to these two items when it's all done and dusted. You can't control a monster like this closely enough to expect otherwise. Fletchers have been given what amounts to an open cheque book and a lot of suppliers, tradespeople, contractors and home owners will be regarding this as a once in a lifetime opportunity akin to winning the lotto. I hope I'm wrong but I can see the headline above appearing every six months or so.

I think they could decrease their costs by cash settling claims for less than the amount Fletchers is charging (ie say $20 per hour + paint compared with $40+)  and let people with minor damage get on fixing their own houses if they are capable and willing.There are lots of DIY experts out there, and if they don't do a good job it will only cost themselves money when they sell.   It would be a win win. Some people might blow the cash and not repair the house, others might add to it and do a total refit/ remodelling but does that matter?

At the moment if the claim is more than $10k + GST you have to use Fletchers and it doesn't take long for cracks in every room to add up to $10,000. If you opt out of using Fletchers currently ther opt out conditions are quite scary, but if they just cash settled it would be less so as you would have more control.

It would speed up claims and be way cheaper.  The assessors appear to us to be overly generous with cracks and paint type damage (I guess that is the cost if you pay a professional) as we could do it ourselves much more cheaply. Then Fletchers could focus on fixing the badly damaged houses first.

Once the repairs are complete they could be inspected by the assessor to regain cover for minor cracking,  Until the house is inspected you aren't covered again for minor cracking, Only major damage. 

To boost up the kitty the EQC should for the whole of NZ:

Charge more for houses built before 1950 that have chimneys. (Maybe 4-5 x more).

Charge more for houses with lathe and plaster or built of double brick before 1950. 

Also for houses with chimneys  and lathe and plaster they should increase their excesses.

This is where most of the smaller claims are generated.

This would incentivise people to  take down old chimneys, regib their houses.

This would not only reduce claims from future events but save lives when there is a large one somewhere else in the country.

I had no idea that cash payments were not available to plaster and paint your own place if the damage were only minor - what a ridiculous situation. 

And totally agree on the other suggestions.

A more mismanaged bureaucratic response would be hard to find - in fact so mismanaged that you have to wonder if central government powers-that-be aren't driven by an intended pork for those in the construction industry with friends in high places.  The GST benefit is also an interesting point.

You can if it is less than $10k, but they allow a couple of thousand to paint plaster walls/paint per room so it soon mounts up to more than $10,000.  After Sept they gave you an itemised list of costs per room so you could see how much they expected it to cost but now they just give you a list of damage so if you opt out you don't know whatcosts  they are going to agree to cover. It is difficult if you do it yourself as you can't provide a GST invoice.  They seem to be lumping most into the $10k + now too as i don't think they want to have people taking the cash as they are worried they won't fix things and will spend the money. Then if there is another event they won't know when the damage happened.  But if they inspected after the repairs and recertified it to be covered for minor cracks again that would solve that.

We fixed our snow damaged gutters the other day (ourselves).

How much have we deprived the economy of... (Actually I'd love to be able to cost this).

All stunningly silly when you look at it from a different angle.  

Of course you should be able to fix / arrange to fix it yourself....

So I take it you don't own a house or if you do you have no insurance as you think people should self insure?  EQC is insurance people have paid premiums for so why shouldn't they claim? Most people couldn't afford the full cost of fixing things themselves . Fixing gutters migh be a couple of hours job (probably falls withing the excess anyway) , fixing cracks and painting your whole house is quite a lot more work and expense.

Apologies LAJ - This time I was not being snidey.... I do own a house, I do insure, I would expect the insurance to pay if I chose to claim... I was actually wondering about the money-go-round and how much, if we'd claimed, it affected the economy, or maybe, to put it the other way round, how much the economy depends on me claiming..... No offence intended.  

At the speed EQC are paying out not much I'd say.  We are still waiting for them to pay us for Feb when our block of 12 flats were destroyed. They rang in April saying they were finalising the claim and still no money. Just 2 more weeks- don't know how many times we've fallen for that one.  Now they say just 2 more days... we'll believe it when we see it.  In the meantime the CC still want 60% of the rates, bank still wants all the interest on the mortgage and even more unbelievable the insurance company made us pay another full year's premium on a building that was written off in Feb and won't tell us why we need to! Only bright side is that we managed to find a clause in our insurance contract that means our rent insurance will carry on a bit longer- initially it was due to expire in July.

My advice to everyone is to get your policy docs out and read every last clause and think laterally about worse case scenarios.  Look at other companies pol docs too and compare clause by clause to see what the differences are and where you are exposed. 

Remember the government will be getting GST on all the money spent, including from private insurers so that must offset the bill somewhat.

It's also the reason why the govt will turn a blind eye and then some to the suppliers jacking the prices and for every charge fee and gst loaded bill going up....following which the CCC will hunt for fatter valuations to slap higher rates on.

Umm expect this to go up even more..half the poeple in our office have still not be seen by EQC yet..I think i said back in MAy it will cost Triple what they thought. Fingers crossed no more earthquakes...with the fund at Zero.

I'm updating as I go back through the presser.

Comments from Brownlee on reinsurers in there now

"presser"?  I thought the standard Kiwi abbreviation was just to chop the word on half and add an "o".   So shouldn't that be "presso"?
 

Updated with comments the govt will look at EQC, and whether to carry on with the status quo once the chch events die down

One of the real take-aways from the story is just how much capital is actually tied up in buildings in general, and in housing in particular, and how relatively vulnerable it is.

Another is that the earthquake potential of the Christchurch area has been very well known for time enough to have done something about it (try Press, June 6 1991 for a telling article).  But greedy councils, under pressure to consent the developing of anything vaguely flattish, and rubbing their hands about the contributions, rates and general increase in size that More Growth would cause, just ignored it.

So let's hope that the P... Poor Performance of the Clueless City Council (s, plural, because that 1991 article was just after some major council amalgamations),  is also part of the 'review'.  I wouldn't bet the farm on That, though.

I know most of you guys will be delighted to know how landlords are suffering here but some are in dire straits.

Landlords are coming to the end of their rent insurance payments and some are in extreme financial distress as they cannot afford mortgage payments on their rental properties.  Some may lose their own homes if they are bankrupted and others are considering moving their families into their dangerous rental properties and letting their own homes so they can pay their mortgages. 

Situations they are in include: 

Houses that are irreparable and on green land.  Rebuilding cannot be started until the EQC payment has been received and the claim has passed to the insurer to pay the balance.  Rates (60%), insurance premiums and mortgage payments continue to be paid.  Once the payment is received the owner will now have no income while the house is rebuilt as their rent cover insurance has been used up.  Unless they have enough cash in reserve they will have no option but to sell up as is. 

Houses that are uninhabitable but repairable.  Properties can’t be relet until repairs to make safe, weatherproof, and cosmetically and are completed.  Rates (100%), insurance premiums and mortgage payments continue to be paid.  Unless the owners have enough cash in reserve they will have no option but to sell their property “as is”  before it has been repaired (and in some cases before it has been assessed) or move into it themselves and let their own house. 

While private homeowners face similar problems, landlords are in a worse position. They are also living in damaged homes, but they have additional stresses as it affects their family’s livelihood.  Many landlords are not rich businessmen but are middle income families who have borrowed against their own homes to buy a rental property. 

Private owner-occupiers are able to “put up with” living in damaged homes as long as they are safe and will live with tradesmen working around them if they can stay in their own home to save the expense and hassle of moving out temporarily.  However, even moderately damaged rental properties are not able to be let out until they are repaired and tenants will not usually be prepared to put up with their home being repaired around them as they have the option of moving to another undamaged house.  

Another consequence to the taxpayer and city council is that if landlords are unable to rebuild/repair these homes this will have the effect of dramatically reducing the number of privately owned rental properties in Christchurch, leading to a shortage of family homes and rent increases.  There is going to be pressure on the rental market from people in the red zone moving out of their homes while they wait for their new houses to be built, and from people in the green zones moving out of their houses while they are repaired.  Taxpayers or the city council will have to provide more social housing if private rentals remain damaged and empty.

Risky business, this rental property stuff, isn't it, LAJ! That's why, as I have always maintained, rents should be more than the cost of ownership of an eqivalent property - to compensate for the risks that have manifested themselves in your post. The fact they weren't ( and still aren't ! ie: property is still an overprices business asset) indicates what a nonsense the 'investment' part of a renter has been over the last decade. A capital risk that can make money? Sure. But as the earthquake has shown capital risk can be a partial, or total, capital loss as well. Those who didn't see the bsiness risk in property, and have suffered, have just learned what all business owners know - business is risky, and risks have to be quantified; paid for; provided for, and most importantly, recognised in advance.

Agreed, but most landlords have rent cover which you would  think will cover most of the risk.  I don't think most people anticipated that it could take 9 months to be assesed so 1 year's cover is not long enough (and longer cover isn't available even if you did). I think most people would think that their property could be up an running within 6-9 months so there is a lesson for all of NZ.  Even if you own your own house do you have enough cover that you could afford to pay rent and mortgage at the same time for an extended period? (Not you personally NA but to you lot in general).

That's why property isn't the 'safe as' asset that it's portratyed to be. Nothing really is in extreme circumstance, like the EQ, I guess. But that property is 'sold' as such underestimates the real risk - even the risk in ones' own home, as you say. I actually don't take comfort in the losses that  people take from any loses they incur; especially if it's from well intentioned but misguided principals, and hope that for those like you and Chris_J,( not that either of you is misguided, I'm sure, but many others are!) that you get a satisfactor result. Will you go back into/remain in property, after whatever results you end up with, or 'move on'? It will be interesting to see.......

Not sure.  We have another problem in that our 12 flats are on L1 land built (in the days when that was ok) but now doesn't meet council rules for density.  Initial chat with council planner was not encouraging.  Planner said it has to be rebuilt identically in form and function.  So I said what, even the chimneys that were capped off under the clean heat program??  Yup.  Can I build fake chimney breasts and put cupboards in them? ?? Nope, has to be a real fireplace (that then has to be capped as it not allowed anymore).  This may sound a little silly he says...

Let's say we will start the rebuilding process but not holding our breathe we will get through the red tape.  We need 12 flats to get the cashflow we were getting before the quake.  Council would prefer 3 house instaed (which would be 1/2 the rent so not viable).  We did buy for positive cashflow to live on the income which we have done for the last 6 years but not sure what other alternative would provide the same income to live on.  Any ideas?

It depends on 'what you do (did)', that's where the money is to be made in NZ from hereon in; real work. My opinion is that interest rates will fall further - the dollars will weaken in companionship. In that scenaraio, I am a borrower at 3.5% ( my target borrowing level for a 'zero' OCR), and then just sit on it, and either then  develop an export focused buisness ( me) or wait until we get a reversal in interest rates ( that will come not too long after the 'zero' as the dollar falls too far) and reinvest the same borrowings, plus any accumulated caital from where-ever ( your flats?) at nominally higher interets rates - just take the spread. My expectations may not be for eveyone, but I'll give it a little more time before deciding if there is a better alternative. (PS: As you may know, I'm a deflationist!)

Nothing deflationary about Auckland house prices now though Nick.

So, Your Landlord: You reckon that people aren't paying off debt ( the old mortgage) as fast as they can etc. at the moment,? That's delflation, you know, reduction of the money supply. So, Yes! I think the Auckland house market is deflating The price falls are just the next step, and will come :). Oh...and I did like this comment today, from another website : "How will the market impose the maximum penalty and pain on the maximum number of market participants?" and "What price action needs to take place to make the greatest number of market participants the most complacent?"

People have always paid off their mortgages.

And when they do the bank has money to lend. 

Do they Your Landlord, in aggregate? Why then are lending volume at 'abnormally' low rates of issuance? Answer: The banks aren't lending out at the rate they used to...or to put it another way...property buyers aren't buying like they used to...and they won't, whislt there is a probablity that they (1) may lose their job (2) might have to take a pay cut (3) might have to repair the hidden faults in that next potential purchase (4) might have to pay higher mortgage interest rates - for any number of reasons ( not my view, but, hey, it's a factor in there for many!)  etc etc. Oh..and also...the banks still may have to increase their liquidity ratios, taking more previously available funds onto their own balance sheets.

Sorry YL, when a debt is paid off that money (Bank asset in this case) ceases to exist. Sounds weird but that's the way our debt based money system works. When more debt is paid off (or defaulted on) than new loan creation you get a debt deflation as NA has pointed out.

Off topic but we are entering a stage where new debt creation, even by government, is difficult because of debt saturation. The real economy is unable to expand to cover existing debt at a time when the demand for rents and interest payments from non working retirees is increasing. Things don't add up so I can see asset prices and interest rates and rents flat or in decline for a long time. Good luck with the retirement plans.

The bank makes a profit when it lends money so they can relend that money to other borrowers.

I was an actuarial analyst. I had kids so I'm a fulltime mum, moved to Christchurch for elderly parents.  My job moved to Auckland from Wellington.  Not much call for actuaries in Christchurch. Husband is a mainframe programmer. Not much scope for that in NZ. We have shares, cash property too.  Spend lots of time doing voluntary work for school,fundraising  budget advising etc. all unpaid.   Could go and find a low paying office job maybe but the whole idea was to downsize, stop working crazy hours and spend time with kids while they are young and do something for the community.  (Which has paid off- 6 year old is doing year 6 maths and reading like a 10 year old).

As we live off our savings we don't want to invest in business we have no experience in in case we lose it all.  Our sort of jobs are hard to find in NZ.

Sounds just like me ( except for the gender and the occupation) 20 years removed..that's why I came to NZ...the South Island..and therein lies the 'problem'. Lots of 'us' have tried to 'pack it in' at an early age ( "How much is enough? being a commonly asked question...) and dceided to live off our success from a relatively short few years of crazy work. The answer seemed for many to be 'property'. Now that the world has changed, 'we' are looking for a way to bridge that 20-50 year gap, and to do that we need to reallocate our assets ( that's code for 'sell property'). Interest rates don't ( and won't?) do it for us, so unless there is real work ( I like you, am too far removed to 'get back in') it has to be productivity of some sort. That invloves risk. But the alternative is an ever dwindling capital and an increasing cost of living. Capital needs to be put to work, not speculated with. That is what I see happening.

You don't have to built exactly as before.  Under the exisiting use provisions of the Resource Management Act (which is section 10 I think) the test is whether the effects of the rebuild are the same or similar in character, intensity and scale.  

LAJ you are exactly correct and this is going to be a real issue in 1 month from now, and a large number of commercial have also used there interuption insurance up as well....may be years before a property is rebuilt, doubt bank will give you a holiday for that long.

The problem actually goes back to the bizarre NZ tax system, that allows generous claims of losses against income followed by a CGT-free gain  at the end.  This has led to misallocation of capital.

Landlords should be sophisticated investors who spread their investors around various asset classes (equities, bonds, gold, cash), and take on a range of rental property types in different locations - all to spread risk. 

In NZ, the opposite is true - they are largely Mom & Pop investors with very little understanding of risk management, who get a few old villas down the road in the hope of getting big benefits courtesy of the tax-payer.  All highly leveraged to get maximum benefit from the system, & backed up by b****r-all equity to cushion any blows. 

Not all, true (& I'm sure the ones blogging here are switched on & have good diversification), but most.     

Consequently the mess now.

Cheers to all.

 

Updated with all comments from press conf. appols also for the opening par - I said costs up from 4 bill, but was up by 4 bill.

Videos to come. Trying to fit the press conf into two 10 min vids, as it's all good stuff, so to speak.

You should have heard English, poor guy must have the flu or a really bad throat infection or something. A few late nights over this wouldn't have helped

Green party levy idea is nonsense.  I'm surprised as it seems to disadvantage their supporters.  Why should people who don't own properties pay a levy?

The best option is to increase premiums on houses that are likely to suffer the most expensive damage (Old house, brick chimneys, lathe and plaster, )and increase excesses on these homes  until they have been modified to reduce the risk. (Like charging smokers more for life insurance.) Or exclude claims caused by falling chimneys or damaged lathe and plaster.

I would like to see a full actuarial analysis done by claim on which houses suffered what damage by what cause so the policyholders pay according to their properties' risks instead of a flat rate. Perhaps by land assessment too?  Although that would lead to drops in property values in areas that are known to be at risk and who knows if there are still faults ready to go in other areas of the city (or other cities)that we don't know about. Still, that is the criteria the reinsurers use when they set their rates.

  I'm surprised as it seems to disadvantage their supporters. Why should people who don't own properties pay a levy?  

How about concepts such as helping others, sense of community, would like someone to do this for me in similar cirucmstances as reasons?  

This is just terrible...only one solution Gerry...give Jenny Shipley more taxpayers dosh

I think there are too many cooks in the kitchen each clipping the ticket on the way. I think it should all be handled by a government ministry of works. I think there is a lack of competition in the building sectors as it is.That fact that they are going around wearing cera branded clothing shows that there is fat to be cut.

The question is, what happens when the big one hits wellingtons. It's not if, but when. There are alot of possible liqifaction zones, especially in the hutt and reclaimed land/earthquake lifted land. Will they have to pay higher premiums for living int high risk areas, which could affect their property prices.

A couple of questions;

If EQC is effectively wiped out on paper, barring reinsurance coming on line, then what is my EQC levy getting me at the moment?

If EQC is wound up in the future, where will all the levies gathered from now on end up that aren't used to buy reinsurance (assuming that comes on line)?

Government backup.  Premiums are continuing to be collected so will build up again over time.  You have the EQC's reinsurance cover which hasn't run out (huge multinationals). Probably a national levy if it came to that in a future disaster.

It won't be wound up.

(Just guessing)

Another difficulty for landlords is the fact insurers are paying loss of rent cover while EQC is paying the building claim.  This means EQC is in no hurry to settle these claims as they are not losing anything by delaying. (In fact they are benefitting by earning interest on the funds and saving on their wage bills by hiring less staff than required to close claims quickly)   A better idea would be to charge a loss of rent EQC premium to cover rents after the insurer's cover had run out.  This would encourage a speedier process and prevent landlords going under.  If they pay claims in a timely manner these premiums would add to the EQC pot but not result in any payouts unless their claim payments are delayed by more than 6-12 months.

In my opinion EQC should under the ACT be paying interest on money that hasn't been paid out in a timely fashion.  The ACT says properties should be assesed and paid out as soon as practicable.  Our property had a engineer's report in March to say it was unfixable.  On what grounds can they withhold 100% of a claim when they have accepted the liability and agreed to pay.  They are earning money on those funds, and we are paying interest on the mortgage, rates, insurance. Not really fair.

The other consequence of these delays in payment is the inequality between policyholders.

For example  take 2 landlords. 

One claim is settled within a month and they can relet their property.  Their rent cover means they have no loss.

Another claim takes a year so the  second landlord potentially has had to pay mortgage, insurance and rates over  that period but had no rents coming in once their rent cover runs out. They end up bankrupt and have to sell off there own house and their rental in a mortgagee sale.

How is that fair? 

In the meantime other home owners with minor damage are having their houses repaired even though they are quite able to live in them as by processing the easy ones first EQC/Fletchers can be seen to be getting through the claims more quickly.

EQC needs to prioritise claims by severity and financial impact  of the damage to the policyholder.

Alex,

There would be a great story in tracking the changing political lines taken from September 2010 till the current (I suspect there are even more changes to come). Starting from the first Christchurch earthquake being good for the economy, then EQC being well covered by reinsurance (apart from the first $1.5 billion X 2 quakes), the AMI bailout only being a stopgap while they found more capital, and now to EQC funds being exhausted. All while leaders maintained confidence in budget forecasts and denigrated anyone who mentioned what has proved to be more realistic costs.      

Hi Colin, good idea, should be fun. I remember doing this with the REINZ press releases a couple of years ago...

The interesting bit will be when you try to work out how and/or why they were so wrong when many others with less resources were much more accurate. The answer might not be pretty.

It stands to reason the EQC insurance levies will rise....how else can they afford to keep Jenny Shipley's snout in the trough.

I've updated with the presser Q&A.- first half at the top, the next one half way down

Cheers

Alex

no surprise to me. I know an engineer very close to the ground in ChCh, he told me months ago the cost would be much higher than that forecasted. This will go up again

I wonder why they always underestimate on these types of things, rather than giving the worst case scenario. I wonder if they are holding back releasing the information about the orange zone areas until after the world cup and election, so it doesn't become the main election issue.

I still believe the government should have introduced an earthquake tax to provide additional funds to rebuild Christchurch. At the same time this would have also allowed the books at EQC to be rebuilt asap. We never know when another disaster will hit NZ, but what we do know is that there will be one and it will be sooner rather than later.

The Christchurch Rebuild (Earthquake Taxation Levy) Act could have been temporary with an expiry date built in by law, (7 years?) and the money collected paid into a separate account rather than into the government’s consolidated fund.  The Act could have stipulated that the money could only be spent on reconstruction/repair projects within the Canterbury earthquake affected area with the exception that a proportion of the tax would go to building back up the funds at EQC.  A missed opportunity there I think.

Maybe after the election David. Gotta keeps things sweet till at least then.

I have heard stories of the "clean up" in the red zone.Back a truck up yo the house get a 15 tonne digger smash it to bits and remove.Un fortunately this happens to just about all the houses not just the severly damagred ones(Maybe Chris-j could help us out here)

these houses are full of plasma tv,s good timber,appliances,hot water cylinders ,wiring all trashed nothing recycled/reused.

the house owners have no worries insurance pays out,retailers get influx of these people buying new stuff and the rest of the country helps pay for it..

fletcher building gets to sell all new materials.

add in the likely price gouging for said demolition and it is no wonder the earthqauke  costs are skyrocketing

Having watched the house next door fall down before my eyes ie 2 storeys into 1, I don't know what fool would be game to go into these places to save a few things (probably damaged anyway).  Given the Feb quake was 6 months after the first who knows if another bigger one is coming?

This was no surprise.  I've said for months that the number of homes with over $100,000 damage is above 30,000.  Through in 10,000 sections that the Government seem eager to abandon, that was $4.5b before you start.  Add say another 50,000 at $50,000 average you get $7b plus another 50,000 with $10,000 damage and we are at $7.5b.

BUT wait until we find out if EQC is liable for another $100,000 because of damage from 2 events, that could add another $1b.

Then once you start actually doing repairs the costs escalate.  (A neighbour with a $50,000 initial estimate turned out to cost $75,000 once Fletcher's started).

So through in an extra billion for that.

All of a sudden we are approaching $10 billion.

THE ENTIRE RESPONSE BY GOVERNMENT HAS BEEN A FAILURE.

International experts are openly and strongly criticising the failed approach by Gerry Brownlee and the National Government.

See Dr Kit Miyamoto's comments http://www.stuff.co.nz/the-press/news/5521305/Too-many-demolitions

Property and business owners should have been engaged at all stages.  Decisions involving the viability of rebuilding on land should have taken very carefully and not rushed into because of media pressure.  Options should have been given to people with severely damaged properties on severely damaged land much earlier and not the forced relocation of residents in undamaged properties.  (Dr Miyamoto in his presentation today described that as not happening anywhere else in the modern world except for perhaps China!).  Heritage demolition should NOT have EVER taken place.  Every effort should have been made to keep and repair buildings, while damaged non ductile concrete buildings like the Grand Chancellor should have been taken done much more quickly.  The red zone cordon should never have lasted this long.

We are now looking like a laughing stock.

Almost every decision has been the diametric opposite of what should have been done.  Christchurch is now at risk of becoming the first doughnut city of the current era in Australiasia! 

Resources are scarce and CANNOT be wasted.  The media need to realise this. 

It's not just Christchurch heading for armageddon, if this was a blueprint for disaster recovery Auckland and Wellington both would face doom when disaster strikes there, and worse than this - there are no reserves to pay for it!

So much could have been done, yet little has, Christchurch is now paying the price, and it's all getting too hard for Bill, Gerry and John - perhaps the three amigos need to ride off into the sunset?

 

 

You are right Chris, but damage has already been done, the big Hotels will not rebuild back to capacity anytime soon in CHC, the centre took 100 years to build, you can't rip it to bits and expect to have it up and running in 15-20 years, it will be a donut city and be very hard to attract the commercial investment needed.

And another one, by Fran O'Sullivan:

Economy in danger and Govt must act 

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10748471

Fran asks, "How hard would it be for the Government to:

* Immediately impose a special tax aimed at higher income earners to start replenishing the Natural Disaster Fund which has been exhausted by the impact of the Christchurch quakes.

* Commandeer large amounts of stable land on the outskirts of Christchurch and launch a big state-led building programme to get people safely rehoused quickly. Do this instead of allowing developers to book obscene profits at the expense of fellow citizens who have already lost enough of their equity through the quakes.

* Tell New Zealanders - including the business community - the truth about just what it will cost in future to insure residential and commercial buildings in this seismically challenged land."

 

 

I agree that the Government should introduce a levy to pay for Christchurch. When you spread the load as far and wide as a levy will do, it then makes it affordable for everybody. Where I disagree with Fran is that it should not be levied solely on high income earners. Why? Because to do that then deprives lower income people from being part of the action and it disenfranchises them from building their own community and country and feeling they have a stake in what's going on. And that's a bad thing.  If everybody contributes to the levy then everybody can have a sense of civic pride that they have done their bit for their country at a time of need.

In regards to it now being 30,000 properties overcap, I made that call several months ago on this website.  (See the comments in my article on June 27)

How officials with full access to the city couldn't have realised this months ago defies logic.  It begs the question: how many other secrets are they sitting on?

As an aside given that all seven days that had significant earthquakes in or east of ChCh (incl the 6.3 and 6.4) were within a day (and at most 2 days) of the largest tidal variations for the month, that would suggest there is a slightly increased probability of a slightly larger aftershock in the next few days.  (That's not a prediction just an observation!).

Ooooh mr moon was right.  I have noticed that large shocks occur after the energy levels on the quake live site has bottomed out a few days earlier.  That looks set to happen in a few days too.  I predicted the June one a few days before based on that chart and impressed the kids!  Mind you a few 4s usually bring the levels back up again so don't quote me (unless it happens).

Chris, LAJ - lookey here:

http://www.stuff.co.nz/sunday-star-times/features/5514786/The-year-the-earth-shook

Q – How predictable was February 22 – and what was the influence of the moon and tides?

AThe specific timing, location, or magnitude of earthquakes cannot be predicted. The moon can sometimes influence small earth tremors, but there is no credible evidence linking it to larger quakes. Says the Royal Society, apparently. What do they know about science ..., I wonder what they know about complexity and Black Swans.

Hey, I'm just joking aboput the moonman!! But do look at http://quake.crowe.co.nz/QuakeEnergy/. It seems to me if the energy drops to 0 suddenly it must be building pressure which may pop once it gets up to breaking point.  Nothing to do with moon and tides. Just seems logical to me.

OK you can quote me now.  Proof by example.  That was bigger than a 4.9!  Awake since 3.30 so I've given up  sleep again. 

When we went to repair plaster cracks and peeled off the lining paper what looked like minor cracks to the assessors were actually all through the plaster and we had to strip the walls and totally regib

Just got an email from EQC yippee. Finally.

But he wants to know how much was spent on temporary repairs after september on our property that was written off in Feb.  What's that about, anyone know?  Surely all the people who have plywood all over their house exterior are not going to have the cost of that deducted from the cost of the permanent repair down the track.  They weren't allowed to, and there weren't enough builders  to fix things permanently back then.

EQC at the moment will only pay the $115k less excess less any expenses already invoiced to EQC.  So if the temporary repairs cost $5,000, you or your bank will only receive a cheque from EQC of $115k less $1150 excess less $5,000 expenses ie $108,850.

How much damage did your overcap property have?  Were the foundations shot?  Concrete or timber? Which suburb?  Is it livable?  I'm finding the assessment of repair costs vary hugely depending on who looks at the property.  Do you think it's repairable?

First time around moderate cracking in every flat (block of 12). Chimneys down thru the roof, slate roof damaged, 1 HW cylinder wrecked (tenant removed earthquake proofing to wrap!!!) 10 our of 12 were still liveable but needed repairs. 

 Situation complicated as each is under the cap so insurer not involved and the cap is based on m2 not $100k.  It was a 2 storey character villa in 12 flats. Suburb Avonside. 

We used the Sept money to fix and got most repairs done but money wasn't as much as actual cost as we ended up having to regib way more than it initially looked like we would.

February totally stuffed, shook to bits in front of us, internal chimneys fell in all the way down and bay windows popped out and it moved off foundations and came apart between floors. Next door house fell down totally. All plaster totally gone.  Engineers say not repairable and we have to agree.  Heartbreaking as we have spent the last 6 years restoring it.

Now we find the sum assured is no where near enough to rebuild despite  us telling broker every time we renovated a flat they didn't increase sum assured except by CPI.  Should have taken more notice I suppose and not just paid premium but we didn't know how much rebuilding would be. Quote by character builder is for about $3,000 +GST per m2!!

EQC man says they will pay SA less Sept claim but where repairs were made with the money they will cover those too so it should be ok afterall.

LAJ, obviously your claim is definitely a lot more complicated than normal.

From your description I am assuming that it's a timber framed building (is it 23 Woodham Rd??)

If the house isn't twisted and only isolated parts of the building moved significantly then it may well still be worth fixing it yourself even if the assessors and so on say it'd be too expensive to repair.  The fact is that a rebuild (as a replica in 12 flats) would be totally unviable for a sum insured value which is a shame as it must have been generating good income.

It's amazing what you can do with timber buildings in terms of repairs.  Often a sledge hammer and bottle jack will work wonders!  I've relocated a few building before including a 2 storey 250m2 villa (about 10m high) shifted in one piece of 40 tons (we only moved it a couple of blocks) and a couple of villas one of which had twisted about 100mm off vertical (that was far easier to fix than I thought using a wedge, block and big hammer - about 5 minutes work after probably half a day of prep).

Personally, I'd be very reluctant to demolish until I'd exhausted all options to repair.  If the house can be put back together, with the brick chimneys out and plywood to selected lower floor walls, then it would perform just as well as a modern building (provided the timber is in good order - which I assume it was if you've been renovating it). 

We've had the insurers write off all of our 2 storey houses in flats, which is surprising given we have full replacement cover, we do however intend negotiating a settlement with replacement on an alternate site (outside ChCh) then fixing them all at a later date rather than demolishing.  I am amazed by some of the decisions being made - often engineers and insurers just put it in the too hard basket.

Interesting. It is timber.   It would involve regibbing every flat . I wouldn't trust that the wiring and plumbing were safe as I imagine that it may have been yanked apart in places. All the experts which have looked at say not fixable.   I put down a lot of the damage to being caused by the gap where the chimney fell down being a bit wide gap with no bracing and also the old bay windows don't seem to have lintels like modern buildings would.  The front 2 bottom rooms have huge 4 door wide spaces that would have opened right up in the past.  They also don't seem to have lintels although the floor joists above are massive so must provide the structure I guess.  The construction is kind of weird I thought.  When we pulled off the lathe and plaster after Feb to gib  I noticed the outside walls seem to be separate from the internal walls, not fixed together.  I guess they built old buildings differently.  In Feb the middle floor seemed to move independently from the exterior walls and rammed them so all the corners have popped out.  The piles are huge blocks of stone and it apperas the floor joists just rest on them and ared tied down.  There is a large basement which I think stopped it from skidding right off the piles.

The roof has also had it (slate). I guess you would have to totally strip it all out, dispose of the rubble, pull all the framing together and rewire , plumb, and gib and reroof the whole thing.  New kitchens and bathrooms all round. I think it could cost more than the sum assured. (Our replacement had a SA limit). Also as it has been so long people have broken in and smashed everything, rummaged through tenants belongings and spread them everywhere.  I won't be surprised if someone sets it alight like the one on Avonside rd as we can't watch it night and day.

Do you think it could be relocated?  I hate modern buildings and it was a project for us as well as a business so I'm very sad it will be bulldozed and the demolition people say they won't salvage a thing.

Sadly, if it's not worth fixing on it's current site then I think it would not be viable to relocate, unless you particularly wanted the house on a site in the country for instance.

Now I'm assuming that it is the big yellow house on Woodham Road.  I actually know the previous owner of that property fairly well although I've never been in it.

If the house had been fully renovated recently (ie new wiring, plumbing and gib), I would say that it would have definitely been worth fixing.  If it is all in average condition with plaster and lathe then it will be a tough call.

The site at about 1500m2 is zoned L1 and capable of 3 units.  The man from the council is partly right in that you can't rebuild 12 units unless you keep the same built form, although I would argue that requiring an exact replica wouldn't be a requirement.  However you will have to remember that under the law 12 months after a building ceases it's use, so do any existing use rights.  There may be some flexibility given the earthquake, however I think if the site was cleared and left for some years, any chance of reinstating 12 flats would be gone.

The reality is that those flats are probably not going to be particularly desirable even if they were reinstated since older flats have been getting harder and harder to rent as newer townhouses and apartments become cheaper.  I think some of your flats were quite large? So you may have been earning $2000pw or so, which may be very hard to replace on that site.

As a comparison a cleared (house collapsed) 1080m2 L2 (also capable 3 units) just up the road on Surrey St (a good quiet street off Tancred) sold at auction in July for $224,000.

Now I know you may not want to hear this, but in the current market and the risks that your site has being near the river, the market value of your site (as a vacant site) is probably under $300,000 at present, despite having a GV of $465,000.  (If subdivided into 3 (which would maybe $25,000 to do so long as the council don't charge development contributions since you have existing units onsite) then each 500m2 section would be worth between about $120,000 and $150,000 in the pre Feb 22 market, but they may be hard to sell in the current market - as a comparison I know of a 700m2 L3 site (3 or 4 units possible) sold for $150,000 post earthquake so prices are all over the place.  A 300m2 in what is now the red zone sold for just $30,000 in March with a GV of $129,000).

Now considering demolition of your building may cost as much as $80,000 (or more since the demo crews are involved in daylight robbery at the moment), then the net value of your property as is where is may be as little as $200,000.

So you'll need to consider that in any decisions on the property.

Rebuilding a similar size building from scratch to the same form would probably cost $1m plus.  If you have received a cash payout that would not be a sensible use of funds unless you could create a very desirable complex of units (which would be subject to getting a resource consent for such a development).

So my thoughts are, that if the property is only worth say $200,000 as is where is, then it may have more value as a long term renovation project.

The only problem is that any work must comply with the building code, so that if permits are required (fixing up where chimneys were and like for like work doesn't require permits) but if permits are required you will need to upgrade to current fire safety standards, this will mean all common walls and floor/ceilings need at least a 60 minute rating (ie 2 x  12.5mm sheets of gib on each side), external walls and windows also need protected etc.  All in all it is seldom worthwhile unless you are upgrading the property to a high standard.

So in my view your options are either to demolish and sell the land which won't net much especially if you have to pay for demolition out of your sum insured amount.  The second option is to rebuild a block of units, which would likely cost more than the insurance and would leave you with a possibly hard to sell and hard to rent asset unless you can resource consent to alter the design and even then it still is unlikely to make economic sense.  The third option is to hold onto the insurance money and keep the property for now until the outlook for ChCh becomes clearer.  The fourth option is to start a renovation of the building.

Option 3 and 4 would depend on what you saw as a future for the property.  If you wish to leave it as flats, the only viable way of doing that would be repairing all the damage as like for like without change (ie without permits), this would possibly be expensive but would depend on what's there at present.

Other options would include doing a full renovation into some other type of property.  Perhaps converting it into a guest house or backpackers a private house or even professional rooms, or just a smaller number of larger flats.  The advantages of this is that it may be cheaper to do (as less kitchens and bathrooms and less fire safety measures).

Remember you might never get the return back up to what it was before, but if you consider that the total cost was only the $200k the property is worth today (net of demolition costs) plus say $200k to do the renovation work then you only have a $400k cost rather than say a $1m cost, so it may be viable to just put it back as a house plus 3 flats or something along those lines.

In terms of structural issues, the bay that has come apart is probably easily put back together.  In villa's, windows on walls parallel to floor joists would never have lintels, indeed you can build a house complying with the current building code without lintels above windows if the floor joists are considered the lintel.  In terms of having two walls, that may be either because there were more recent internal alterations or because it was built in two parts (perhaps an early addition).

In regards keeping the property intact for now.  I'm assuming that the property has a yellow placard, make sure all the flats are completely clear of rubbish and furniture so as to avoid squatters moving in (although there is probably plenty of better accomodation for them anyway!), secure all window and doors, disable all first floor fire escape access, board over all ground floor glass with ply on the inside, fence securely from the road with a locked gate, but make the fence blend in (ie a standard paling fence which is stained brown or something to make it look completely normal and not abandoned), also keep the outside well maintained.  You would also need to look at bracing up any areas of movement inside the house especially where chimneys had collapsed.

If you do like the old house, keeping it may prove financially the best option, either by selling as is where is if you want out, or by keeping to fix at a later date.

(In my opinion selling "as is where is" may achieve more of a return than by paying the cost of demolition and subdividing (however this would depend on whether you were paying for demolition or whether your insurer provided this amount in addition to the sum insured).)

I'd be tempted if I were you to just secure the property and sit on it then think of it as a project to work on when things settle down.  Meanwhile use the insurance money to do something more profitable at the moment (there will be lots of opportunities out there from people who just want to get out of town).  Also if by chance the site ever did turn "red" you would probably be financially better off taking the 2007 LV  than by selling it.

 

Thanks, lots of good advice,   Interesting about the lintels= I wondered.  The internal structure has never been modified.  Each flat is built in one of the original rooms so it was like that originally.  (Not keen on advertising the address as who knows whose reading this!)

It has a red sticker.  We boarded it up initially  but people have ripped it open again and prised open the doors.  All the earthquakes  shake the doors open even though they are locked. The bay windows would be hard to board up I think as they aren't really attached now.

 Our insurance policy pays for demolition, fees and reasonable costs and the cost of council required improvements on top of SA. . (Replacement definition is only to original state when built.  Extra benefit is to improve to current standards. So all the fireproofing, alarms, firescape etc I would read to be on top of SA. (See Vero's maxiplan pol doc). Also includes demolition.

Another interesting thing is Vero made us pay another full year's premium and did a CPI increase on anniversay date in March,  As cost of build or repair is > SA we are going to try to claim the difference between the old and new SA as damage increased in June.  As we haven't even been inspected by EQC yet (it was Vero who did the inspection) and they won't pay until they have inspected it I can't see how they can refuse to pay the new SA (in total).  Or better still the balance of the cost of rebuilding from the new SA.

I'm not sure what land prices will do.  Maybe down the track  once the river reserve is finished it may be a desirable site.

Trouble with renovating it is a) insurance company may refuse to insure it again if they have written it off,  b) they almost certainly will refuse to keep paying rent cover if we don't demolish and rebuild as they have to pay until we have had "reasonable time to rebuild" and a renovation will be way slower.  We can't afford to take years to renovate it and use up all our capital and have no income as it is what we live on.

.

Your insurance situation is obviously quite complex.  I must say that I am envious of loss of rent for the reasonable time to rebuild!

If the insurer is liable to pay the rent until it is rebuilt, and they are responsible for the rebuild (and it's timeframe) then I would just let them work at their own pace and take the rent payments.  Of course as soon as they cash settle you, loss of rents would stop so it's probably in your best interests not to push too hard, unless they decide to put a time limit on rent payments.

I had assumed that your insurer would want to pay you the sum insured value and walk away, but if you can get a rebuild on a replacement basis you would be much better off.  Obviously a 600m2 building in 12 apartments with a slate roof, solid kauri doors, timber weatherboard etc would probably cost above $1.5m to build, which I'm assuming is well above the sum insured value. 

If you have to take the risk of any cost overruns, and Vero is limited to a fixed amount, I would be very cautious.  Construction projects never come in on budget!

Unless you can get Vero to build it exactly as you want it with no effort from you and no risk of cost increases for you, then I would consider a rebuild, otherwise I'd take the cash and invest it to get the income.

Remember if the rebuild cost was to be $1.5m say, you could probably find investment property (existing buildings including land in any other part of the country) that returns 7 or 8% which is as much as your existing property was earning without the effort of waiting for a rebuild.  Of course the rebuilt property may not be worth the amount it cost to rebuild either which would be problematic.

There's lots to consider when making a decision, so I'd want to know 3 things before making a decision:

1. How much will Vero pay for them to walk away leaving the property as is (this is always up for negotiation particularly including cost of demolition etc).

2. How much will Vero pay for them to walk away leaving you a clear site.

3. What exactly are they prepared to rebuild and will they continue to cover loss of income until completed?

Until you know all three it's probably best not to make a decision on demolition, because the last thing you want, is to be left with a vacant site that might be very hard to sell after having taken a cash payout and the insurer having paid a king's ransom to a demolition firm that could have been lining your pockets.

In regards continuing insurance, we had a fire in a property last year (before the quake), the property was in Timaru and had a market value about $250k.  It is a similar property to yours (a 2 storey villa in 4 flats) of about 300m2 floor area.  It was sum insured for $240k, full replacement would be $600k.  The repair cost was estimated at about $80-150k (quantity surveyor at the lower end, builders quote at the higher end [who didn't want the work]).  Indemnity was determined as being $80k as the land (about half an acre) was worth about $170k.  They settled at $110k cash.  The thing is however they were happy to leave it sum insured at $240k even after the payout was made, even though they knew we were leaving the house as is for the time being (which is now an extended time because of EQs).

Also I bought a fire damaged property 10 years ago which has been left as is for that time and has been sum insured the whole time.  So depending what you want to do to the property and what you can negotiate with the insurer there may be possibilities.

 

Thanks for that, we were thinking along the same lines. 

What is your take on them demanding another full years premium in March, and giving us a CPI increase?  They had Vero's report saying it is unfixable but it's not enough for them to pay out on without inspecting themselves. They only looked at it for the first time last week and now it is much worse than it was in September.  Do you think we have a contract for them to cover the additional damage up to the new SA as June was in another policy year and the contract had been renewed? (Given the policy is for replacement with SA and the SA is less than the cost of replacement).

Question (probably silly but...) - why do we even need the EQC? People who are covered by EQC are the ones who have insurance cover. Is the EQC a sort of bail-out scheme for private insurance companies??

Having to coordinate EQC & insurance companies only seems to have created delays and issues for affected homeowners so I'm really wondering why cover isn't left entirely to insurance companies. After all, it's their line of business.

Elley, EQC was original called the Earthquake and War Damage Commission, designed to provide coverage in the event of damage covered by those two events which weren't at the time covered by fire insurance.

In the 90s it got whittled down to $100,000 plus GST limit with private insurers picking up the rest.  It was never adjusted (it would have been equivalent to about a $250,000 limit today - imagine the cost if they had raised the limits!)

I've asked the same question - but don't think I got, or don't recall the response.

I'd be interested too - as if there were an option to opt out, I'd definitely consider it and put all the business the way of my private insurer.

 

I'm not sure the private insurers would want to cover it but I guess they would at a price. 

I don't think it works at all having 2 parties responsible.  Eg EQC stalls on paying claims but that doesn't affect most of their claims that are over the cap as insurers pick up the increasing costs, not them.  I think that is why they are focussed more on sorting the smaller claims as they are wholly liable for them so delay costs them.  Also with rent cover it is the insurer paying not EQC.  If the EQC paid the rent cover I bet those would get sorted first.   Then there is the fighting over what is an event , etc.  If there was only one insurer it would be easier.

I think especially for landlords it would be better to be able to go with their own insurer.

I think having EQC makes it more complex and delays things more. But I would think that the governmnet would have to underwrite insurance comapnies if EQC didn't exist, as otherwise they may not want to take on the risk of some aeras that have high earthquake risk. That would be more of a problem.

Kate, how was the States? how did the book go?

Hi, andrew, had a great look around - travelled over 2000 miles by car - Montreal to the Maritime Provinces and down the east coast of the US heading inland to Pennsylvania.  Glad to get home just as Irene started her drive up the coast!

Got no reading done whatsoever - spent every spare minute shopping :-) :-).

Ludicrous !  How got they have been so wrong with the forecast ? - going from $3.1bn to $7.1bn - off by $4bn ???!!!

National are hoodwinking average NZ'ers on a daily basis by completely bulls*tng the general populous with their statements on wage growth and economic growth over the next couple of years at levels never seen previously in the country !

It is a complete joke - DonKey & Bling-lish tell us any old crap to suit their political means with no decent opposition to give them a run for their money.

I wonder what else wil come out the woodwork after the election ...

Unfortunately NZ has been successively rooted over the past 20-30 years by egotistical, old fashioned self serving politicians stuck in a rut.

Going forward the future is depressing for NZ - another big one in Chch or Wellington - and the average taxpayer will be forking out for years & years to come to pay for it.  Oh yes ! - and also paying for all the retirees because no-one has the balls to raise the retirement age or make Kiwisaver compulsary and at decent contribution rates.  But hey, we can afford to give the very wealthy a 6% tax cut to keep our "business" buddies happy and sting everyone else with GST on the basic necessities in life like milk, cheese, fruit, bread and meat.  Doesn't this all kind of stink ? - why is milk cheaper in Saudi Arabia, the UK and Australia than in NZ ??!!

What a joke.  Watch out an even more massive exodus to Australia in the next few years.

It will soone be evident in the next couple of years that National have been spouting crap since they got to power and have done absolutely nothing other than Don-Key taking his own personal ego trip as PM

BacktoAus - quite!

NZ's governance is truly woeful. I'm moving to Aus in the next couple of days, obviously their pollies often behave like imbeciles too, but IMHO the govenance of Aus has been far superior to NZ in modern times  

After seeing this not unsurprising announcement I feel even more comfortable with my decision to emmigrate 

absolute amateurs!!!!!!!!!!!!

Many thanks to commenters above for the fascinating discussion with lots of local detail.

Appreciate the community spirit evident above.

cheers

Bernard

Has the ratings agency S&P developed a crisis of confidence  since downgrading US debt ?

... I notice in paragraph 3 of the article that they're now " Statandard & Poors " ......

..... the poor buggers have developed a statammer .

Fair enough when your moody friends leave you hanging out alone  , ' like a shag on a rock  .... those fecking  fitches !

Maybe they should rename themselves Double Standard & Poors :-)

so many issues with EQC, Insurance Companies, etc, it's just scary.

when I dealt with EQC back in the nineties, I remember the then Minister of Finance, Bill Birch taking money from the EQC fund to put into the consolidated fund.

am sure one year was $375mill (how much could that have been in 2012?).

does anybody else remember this, and how much was taken out in total whilst Bill Birch was MOF?

matt in auck - yep, good luck in Australia : similar lifestyle, sunnier weather, better standard of living, more opportunities and compulsary super - it's hard to go wrong !!  I can't wait to get back there

Woeful, indeed.  What really enrages me is that they are constantly misleading us - reckon they are totally massaging this data release - probably have know all along or had a very good idea what the real $$'s were - just keeping a lid on it until after the RWC and the election.

DonKey needs to realise that some of us can spot his bulls**tng skills from his corporate days a mile off