By Janine Starks*
It’s time to start the New Year with a big question; should families with significant equity in their homes, be rebuilding in Christchurch?
The Christmas quakes became a tipping point and forced me to question why I wasn’t being a bit more frank about rebuilding risks and the idea of letting your equity leave town without you.
So ‘frank’ is my New Year’s resolution. Gerry, Bob and Roger might not like it, but there is a role for our friend Frank in pointing out the risks homeowners are taking.
The crux of it is this. We have had four major earthquakes and ongoing seismic activity is possible for the next decade. That means there is no way any insurer or the government can guarantee the future level of insurability of Christchurch homes, or know how it might alter over the medium term. Yet most people with the opportunity to rebuild are thinking of no other option apart from blindly ploughing all their money back into the local area. The emotional need to own your own home is so high, the risk assessment and the future impact on wealth is ignored.
Equity could be throttled by excess
There is a very real risk that the level of earthquake insurability will decline and there will be more ‘risk sharing’ between us as homeowners, the government (EQC) and our insurers. We could see a combination of higher excesses, exclusions of specific items, and capped/fixed sum claims. In frank-speak, that means your equity could be up for a pummeling in a large event where the EQC limit is exceeded – the degree of pummeling is unknown as the question of how high the excesses could go may keep changing over the next few years (especially if more earthquakes hit).
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Second, there is the risk that insurance pricing and availability will become more granular. By that I mean that insurers will look closely at the actual location of the land and the risks it poses to the home.
Finally, there is the risk that future events lead to some or all of Christchurch becoming uninsurable for earthquakes. Things are still too fresh and fluid to have certainty over how reinsurers will cope with the multiple quake environment over the next five years. While they are tiptoeing around the topic, families are on the cusp of making big decisions with their finances. There are calming noises from officials because the new events are not adding a lot of marginal cost to insurers’ liabilities.
For now we are just re-shaking damaged unfixed homes. When the rebuild finally gets going in the east of the city, how will the reinsurers feel about the new risk?
One opinion is that earthquake insurance will remain in some form and we shouldn’t be concerned. It’s just important that we have enough money to put a roof over our heads and we’ll all just downsize our houses. Unfortunately, in my field of work I can’t tolerate the issue of equity being shoved into a social context. We are used to being fully insured. We are a nation that doesn’t like taking risks with our wealth and when we lose money we wail like banshees.
My frank questions to homeowners are:
1. Why would you plough your own equity into a rebuild if you had a choice?
2. If the percentage of your home’s value covered by earthquake insurance declines or disappears, leaving you with only $115,000 of EQC cover, can you cope with
the consequences of losing some of your equity in a future event? Not just financially cope, but emotionally cope? Remember, those with a lot of equity tend to be middle aged and older, with less time left in life to replace it and major impacts on retirement plans.
The employment trap
When it comes to the reasons for rebuilding, most people jump straight for the ‘job card’. It’s a fair call because people are financially hamstrung by their job or business being Canterbury based. But for families who own the majority of their home, their equity could leave town without them. This is a decision which should be given air-time for those who want a lower risk approach to protecting their wealth.
Being able to separate yourself emotionally is terribly hard and it’s only when you attempt to, that you realise how intertwined your home and happiness is. You and your equity needn’t have a permanent separation – just a long distance relationship for a while. Give it three to five years and a clearer picture will develop on insurability and seismic activity. Perhaps then, you could co-habit if you are comfy with how the risks pan out.
Insurers will payout the replacement value of your home if you purchase or rebuild in another city or agree to do so within a set time frame such as 2 years (you sign a statutory declaration to agree to this). The desire to settle is high and this makes insurers negotiable over issues such as inflation adjustments and payment of the accommodation benefit in the policy. You would end up renting in Christchurch and being a landlord in another city, which to some extent will cancel out.
This decision is not about guessing if there will be another big event. It’s simply about acknowledging that insurability risks exist and lowering your exposure if you can’t tolerate the potential for loss.
Rebuilders currently have some choice. The vast majority of people have no choice.
Their homes simply need repairing and they cross their fingers and hope that any future insurance changes don’t sting too hard (or they sell up). Each of us is responsible for our wealth and financial future, so consider the options if you have them. It’s a very personal matter whether you can live with the risks or not, so don’t be influenced by others.
The fish hooks
With every solution there are downsides. Letting your equity skip town may offer a greater degree of protection in an uncertain climate, but you’ll need to think about
Inflation risk: price rises in Christchurch being different to other regions (relevant if you move your equity back). Offset to some degree by negotiating an inflation
adjustment with your insurer. The insurer is currently sitting on inflation risk untilthe quakes subside and it’s your turn in the rebuild queue.
Affordability: as the equity in your land gets left in Christchurch, will the replacement value of your home be enough to cover a smaller purchase, or can you afford another section?
Bare land is uninsured: your insurer will settle up with you and demolish the property, leaving bare land (not covered by EQC in a future quake). If your land is prone to liquefaction or slips, this will be a high risk strategy.
*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.