The Opposition Labour Party says it would intervene in the insurance market as a last resort to help kick-start rebuilding in Christchurch if it wins the upcoming election, although this would be subject to the fiscal risk to the Crown of doing so.
Releasing the party's earthquake reconstruction policy on Monday morning, Labour Party leader Phil Goff said Labour reserved the right to intervene in the insurance market as a short-term measure where there was market failure to give the confidence required to get the market functioning properly again.
Prime Minister John Key attacked the plan later on Monday, saying Labour would effectively be writing out a blank cheque which could incur large costs, as seen with the government's retail deposit guarantee of finance companies, which had provided valuable lessons.
"If the Government walks in today and writes a blank cheque it won't be a short term fix it could be tremendously expensive and it will be very difficult to exit," Key said at his post Cabinet press conference on Monday
"There is no free lunch here - if we want to be the insurer of last resort right here as we stand today everyone needs to understand what we're signing up for," he said.
Despite attacking Labour's policy, Key would not rule out the option of the government having to become the insurer of last resort.
"My view having assessed it all is that we need try and work with the private sector providers and if in the end having tried everything, that all fails then we'll come back and have another look at it but I'd rather give it a bit more time," he said.
Labour's policy also included a promise that a Labour government would purchase an initial tranche of land in Christchurch sufficient for 1,500 new homes, which would be made available initially for red-zone homeowners to buy. The upfront cost of this aquisition of land would be about NZ$230 million, based on an average land value across Waimakariri, Christchurch and Selwyn of NZ$155,000.
Labour would also provide NZ$100 million from the Budget's NZ$5.5 billion earthquake costs fund for compensation to red-zone homeowners for home improvements made after the 2007 valuation date and not currently covered by the government's offer to purchase red-zone homes for their 2007 CV. Compensation would be set at a maximum of NZ$50,000, with a minimum of NZ$5,000 and proof required of the amount spent on improvements, Goff said.
An independent 'Insurance Commissioner' would be put in place with statutory authority to put in place a disputes mechanism and to review the operations of the private insurance industry.
NZ$2 million would be made available to fund test cases of disputes between Canterbury residents and their insurer, where the residents appeared to have been unfairly treated by their insurer, to try and establish precedent on major issues.
"The Government set aside NZ$3.2 billion of the NZ$5.5 billion Canterbury Recovery Fund as contingency funding. This recognises the difficulty of predicting just how much will be needed to rebuild Canterbury. Labour's plan is realistic and necessary. It recognises that Cantabrians cannot afford to wait any longer to rebuild their lives. The issues they face are immediate and real," Labour said in its policy document.
"Private insurers are remaining highly cautious and conservative. The reluctance of large insurance providers to issue new policies is delaying the ability of Cantabrians to rebuild and businesses to reinvest and grow," Goff said in a media release.
"Without new insurance residents are unable to access the finance they need to build a new home or start a business. This uncertainty is stifling the recovery. Labour will explore all options with the industry to break this deadlock and provide certainty to residents," Goff said.
"As a last resort Labour reserves the right to intervene in the insurance market as a short term measure. The Canterbury earthquakes are without precedent and force us to consider all options. Labour is committed to ensuring that any specific option pursued will be subject to the priority of careful management of the fiscal risks to the Crown," he said.
1,500 new sections
There would be no obligation on the current 6,000 red-zone home-owners to buy the 1,500 sections to be made available by the government, Goff, and Labour Earthquake Revcovery spokesman Clayton Cosgrove said.
"However, the offer will benefit all residents by taking excessive developers' margins out of the equation and directly moderating property prices across the market," Goff and Cosgrove said.
"This deal may still leave some homeowners out of pocket, but not to the extent that they would be if purchasing privately where developers are charging their own profit margins," they said.
"If there is evidence of price gouging by developers as the Government attempts to acquire land the Labour will consider, as a last resort, using the land acquisition provisions in the Canterbury Earthquake Recovery Act to ensure a fair price is sought and paid. Labour will also undertake an immediate audit of Crown-owned land in the area to determine how much could be suitable and made available for development.
"The overall final cost to the Crown will be low. While we estimate the up-front cost to the Crown to be approximately NZ$230 million, this cost will be recovered through selling the properties at cost to residents. This will leave the Crown to meet a small financing cost. The up-front estimate of NZ$230 million is based on an average land value across Waimakariri, Christchurch and Selwyn of NZ$155,000. This is a conservative estimate as it is based on most recent developed land prices," Goff and Cosgrove said.
'Cash for post-2007 improvements'
Labour would honour the government’s currency buyout package for homeowners with affected properties in the 'red zones' based on their 2007 rateable value. This included compensation for consented changes since 2007 that increased the foot-print of a home.
“In addition to this, Labour will also compensate homeowners in the red zone for home improvements (e.g. a new kitchen or bathroom) above NZ$5,000, up to a maximum of NZ$50,000 which are not currently covered by the Government’soffer,” Goff and Cosgrove said.
Compensation would only apply to improvements made since the established date of rateable value, while applicants for compensation would be required to provide proof of the amount spent on the improvement.
“These improvements add to the value of the property and would have been taken into account in subsequent valuations if it were not for the earthquake. Officials have noted that 63 per cent of properties sold in Kaiapoi, for instance, in the 12 months before the first earthquake were sold above the 2008 rating valuation, indicating that these improvements make a material difference to the resale value,” Goff and Cosgrove said.
“Labour has capped the amount of compensation available at NZ$50,000 to ensure this is not an open ended commitment. While some residents may have made improvements above this cap, the taxpayer cannot afford to meet every cost. Under this plan these residents would not be left totally out of pocket. Providing a minimum level of NZ$5,000 will also ensure the process is not overloaded with a large number of small claims and also distinguish between general maintenance and home improvements which add the value of the house,” they said.
“We will ring-fence a maximum NZ$100 million from the Canterbury Recovery Fund as compensation for home improvements, made after the valuation date, not currently covered by the Government‟s offer. This figure is based on an average of NZ$10,000 per household. Although, we do not expect every red-zone house to fall into this category.”
(Updates with videos of criticism from PM Key, further policy details on post-2007 improvements.)