By Janine Starks*
From my mail bag:
Why are people in the Red Zone of Christchurch moaning so much about the government offer to buy their homes at Rateable Value?
The government pay their lawyers fees, there are no agents’ costs and they are getting values which were set when the housing market was doing well. Many have houses which are a total loss, so their insurers will pay replacement value. That’s bound to be higher than the rateable value so they’ll be doing well. Don’t you think there is too much fuss over this?
No I don’t. I wholeheartedly disagree with your assessment of the Red-Zoners good fortune.
While your letter will create much eye-rolling in red zone circles, you are not a lone voice. Having skipped through a few blog sites and letters to the editor, there is a scary lack of understanding.
Rather than huff and puff, let me give you a taste of the financial fish-hooks.
Where values lies?
The most common misconception out there is that rateable value is good enough. Some argue that ‘market value’ should be the true assessment, but financially that’s not good enough either. The whole foundation of the insurance industry sits on the concept of ‘replacement value’ and it’s highly disappointing that many red-zoners could miss out on the full value inherent in their policies. Financially, the concept of ‘replacement’ is an entirely different animal to other types of values put on houses (see the box opposite).
Rateable Value– a value assigned by the council every 3 years using an independent valuer. They use plans held on file, local sales data and building costs at the time. No chattels are included. Generally it’s an office based valuation as most properties are not viewed.
Market Value– the price a willing buyer would be prepared to pay for your home (pre-earthquake). It would take account of the location, age, condition and size of the house along with any features such as landscaping, renovations and chattels.
Replacement Value– the cost of putting an entirely new house (of the same size and similar spec) on your land and making it compliant with the latest building regulations and earthquake rules. The cost can also include a long list of professional costs from architects or drafting fees to engineers costs, quantity surveyors fees, geotech report, legal fees and council consent fees.
The only way to fully unlock the value in your insurance contract is to physically rebuild. That way your insurer has to incur all the costs of a replacement house. If inflation causes price rises, they’ll be wearing the cost.
They’ll be paying the project management fees and all the extras involved in building. And, if they claim they can do it for a cheap square metre rate, they’ll have to deliver or revise their initial costings in order to deliver.
There are two types of red-zoners who will end up short-changed and unlikely to see the full value of their insurance policies paid out, unless they seek legal advice or negotiate with insurers: 1) Those whose houses are deemed repairable and 2) Those who can't afford to buy new land.
Let's start with the first:
Those with repairable houses are being directed to the government offer of selling at Rateable Value. The affordability of rebuilding will be out of reach so they are left to find second-hand homes that have been repaired after thousands of after-shocks, when they spent years paying for replacement insurance.
How must this feel when a bulldozer demolishes your home and you watch your neighbours get a brand new house built by their insurers, but you miss out? You get the financial equivalent of a poke in the eye and told to accept the rateable value.
The alternative is that Red-Zoners take on insurers via the courts and try to challenge the assumption that their replacement insurance cannot be claimed on. The average person doesn’t have $30-50,000 to fund a few days in court, let alone a possible appeal.
There have been rumblings of class actions, but there are a multitude of policy wordings and a multitude of different repair circumstances to complicate things. A test case would be useful, otherwise the government offer is all that’s left.
Now for the second; those who can't afford to buy new land
Insurers want to deliver on their promise and build new houses for their customers, but not everyone can re-mortgage to fund higher land costs. The elderly and those on budgets are stuck as they can’t take advantage of their insurers offer. Insurers generally won’t pay out the replacement value in cash. If you want cash, you have to take the market value of your home (the reinsurers dictate this).
Insurers have come to the party for red-zoners and come up with other options. They will let them have ‘replacement value’ so long as it’s spent on a second-hand house, or a house-land package. This is brilliant, as in theory it seems the home-owner can extract the full value of their policy. But in practise fish-hooks are appearing.
Who values the ‘replacement’ and what gets included? Some insurers are using very low square metre rates, providing little detail on how they arrived at these and not including the add-ons like the project management fees they would have incurred.
I have seen calculations of replacement value, which are so low they are less than the rateable value. Intuitively that makes no sense and will lead to the perception that insurers are not playing fair. On the flip-side, I’ve also seen insurers use calculations which have been detailed, carried out by independent quantity surveyors and look fair. At the end of the day, it’s the insurers with their reputations on the line and how they treat their customers will be noted by other home-owners.
How could the insurance industry respond?
Transparency, communication and fairness are going to be the qualities that red-zoners judge their insurance companies on. When insurers refuse to pay out replacement value on homes they deem repairable, they need to be transparent about the legal basis for this.
At the moment there is a cloud of suspicion. When dealing with those who can’t afford to buy new land, insurers need to calculate replacement values fairly. Detailed scoping by independent quantity surveyors will instil confidence and trust. It will be important to treat customers as individuals, but at the same time ensure equality across policy-holders.
Do you have a question for Janine: You can email her directed at email@example.com, subject line: Financial Agony Aunt. Anonymity is guaranteed.
*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