Billions to fix prone buildings

Property

Cost of upgrading NZ's 15,000-25,000 earthquake-prone buildings between NZ$2 bln and NZ$12 bln, Ministry of Business, Innovation and Employment estimates

7th Dec 12, 10:51am by Alex Tarrant

By Alex Tarrant

It will cost nearly NZ$2 billion over 15 years to upgrade all earthquake-prone buildings in New Zealand to standards proposed by the Ministry of Business, Innovation and Employment.

However it could cost up to NZ$10 billion more than that, according to more stringent options being considered.

Building owners were unlikely to be given any tax incentives to upgrade buildings, Building and Construction Minister Maurice Williamson said about an option asked for by the Property Council.

New recommendations released by Williamson on Friday were based on a report from a Royal Commission investigation into the Canterbury earthquakes. The public is now being asked to provide submissions on the recommendations before they are enforced.

Read the Royal Commission's Final Report, Part Two (Volume 4) here.

Read the Ministry of Business, Innovation and Employment's public consultation document here.

There were between 15,000-25,000 ‘earthquake-prone’ buildings in New Zealand, the Ministry said. It recommended the current definition of earthquake prone remain the same at 33% or below new building standard.

Ministry officials stressed the 15,000-25,000 was a “very ballpark” best estimate. It represented about 8-13% of all non-residential and multi-unit, multi-storey residential buildings.

The Ministry recommended all buildings in New Zealand – excluding most residential buildings – be assessed within five years for how earthquake prone they were. Residential buildings higher than two stories and with three or more dwellings in each could be included.

Critical buildings like schools and hospitals would have to be assessed faster than the five years proposed.

Owners of buildings below 34% new building standard (NBS) would then be given 10 years to strengthen or demolish the buildings. Williamson noted the 34% NBS related to seismic risk in each location.

The Royal Commission recommended unreinforced masonry buildings should have to be strengthened within seven years of any law change, although MoBIE questioned whether this would be feasible.

Estimates provided by the Ministry put a cost of NZ$1.717 billion on upgrading all prone buildings to 34% NBS, although they estimated NZ$37 million in ‘benefits’ from the work, giving a net cost of NZ$1.680 billion.

If that work was to occur over 28 years, under the current building regulation system, the net cost would be less, at NZ$933 million, the Ministry said.

Other options gave higher costs:

To upgrade all buildings to 67% NBS over 15 years would cost NZ$7.692 billion, and give benefits of NZ$89 million
To upgrade all buildings to 34% NBS in 10 years would cost NZ$2.194 billion, benefits of NZ$47 million
To upgrade all buildings to 67% in 10 years would cost NZ$9.829 billion, benefits of NZ$114 million
To upgrade to 34% NBS in 5 years would cost NZ$2.798 billion, benefits of NZ$60 million
To upgrade to 67% NBS in 5 years would cost NZ$12.533 billion, benefits of NZ$145 million.

Williamson said that final option would be “catastrophic.”

“The building stock in New Zealand would be pretty much uneconomic,” if the ‘gold standard’ was demanded, Williamson said.

“The recommendations contained in the Royal Commission’s report could have significant economic implications for those building owners,” he said.

“We believe it’s important to provide a workable balance, while still being realistic about what is practical and affordable. We want to get the views of New Zealanders to ensure our earthquake-prone building policy is robust.”

Tax incentives unlikely

The Royal Commission noted a submission from the Property Council that there should be changes to the taxation regime to allow for the deductibility of earthquake strengthening expenditure.

While the Commission said this was not a matter on which it could properly make a recommendation on under its terms of reference, “we record our view that it is important that barriers to addressing the risk posed by earthquake-prone buildings are considered, and removed or mitigated as and where possible.”

But Williamson told media he would be “very, very reluctant” to recommend such a move.

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23 Comments

by Kleefer | 7th Dec 12, 11:20am 1354832417

Yay! Think of all the stimulus!

by powerdownkiwi | 7th Dec 12, 11:29am 1354832977

I thought economics was superior to physics.

So why not just bump up the value of the buildings until they're impervious?

by waymad | 7th Dec 12, 11:36am 1354833381

Interesting to see the woeful benefit/cost ratios under every darn one of these scenarios.

So, why not just cobble tergether a Fund (let's call it the FUBLIE - Fund for Unstrengthened Buildings' Liability for Inadvertent Extinctions), chuck a few milly in per year (and BTW, don't invest it in the RAM's of the financial world), and use it to pay off the few unfortunates who get caught up in another one of Gaia's little Events.

After all, that's exactly what ACC does for skateboaders, motorcyclists, skiers, and other workers who manage to run afoul of the laws of gravity or common sense.

by Kleefer | 7th Dec 12, 4:21pm 1354850462

Excellent point Waymad (you're rapidly becoming my favourite commenter in the absence of GBH). When talking to supporters of ACC I ask them why the "no-fault" principle shouldn't be applied to other forms of insurance. Heck, I could burn my house down or murder my wife and still get a payout!

by Gummy Bear Hero | 7th Dec 12, 4:55pm 1354852538

Truth be told , between your posts , notaneconomist's & waymad's , you guys had it all covered . No need for the Gummster to put pinky to keyboard ....

...... damn fine work by all three of youse !

( P.S. ...... waymad prefers to be called Ena .... it's a Coronation Street thing .... say no more ! )

by notaneconomist | 7th Dec 12, 5:12pm 1354853537

Good to hear your still around GBH I have certainly missed your logic and humour.

by Gummy Bear Hero | 7th Dec 12, 7:44pm 1354862661

..... there are times when one gets a smidgeon tired of the same old fear mongering that goes on around here , one reaches the peak , the point of gloomsterising overload .....

And then you just decide to get on with this wonderful life , in the real world ...... . away from the chicken littles ...

..... but it is nice to pop by from time to time , and witness the likes of your good self , HughP , waymad & Kleefer stirring up the Malthusian-Luddites !

by scarfie | 7th Dec 12, 6:09pm 1354856975

Here was me thinking that Waymad was just GBH in drag.

by powerdownkiwi | 7th Dec 12, 6:53pm 1354859633

Nah - Waymad is capable of jettisoning pre-conceptions aprez cogitation. Not all the time, but it's a significant POD.

by notaneconomist | 7th Dec 12, 2:20pm 1354843208

One law for business please ! Most of us have to spend a fortune complying with Health and Safety and all the training.

Mr Williamson if you think the final option is catastrophic, then maybe you have learnt nothing from Chch. The last option of $12.533billion for building upgrade to 67% of the NBS sounds pretty damn cheap to me compared to the cost from failure of a building in an earthquake.

Building owners should be paying the costs of the upgrades and doing it now. Ratepayers, ACC levies and the taxpayers will be picking up a large chunck of the costs involved if the building collapses and these buildings aren't up to the standard. The cost to human life, injuries sustained, business interuption to the economy, Government and it's Agencies inefficiencies and many other factors should be taken into account before you state it would be catastrophic.

Mr Williamson you are sending a clear message to affected property owners that they will not be liable in anyway if their building isn't up to standard and if the building owner isn't liable well as I said the rest us will be.

If Governments can't manage for planning essentials like disaster issues then you haven't got a hope of managing anything else.

by Wolly | 7th Dec 12, 2:34pm 1354844096

Hmmmmm....so life in Middle Earth promises some hefty costs for all....in the end the costs fall on those staying put.

by wtf | 7th Dec 12, 2:38pm 1354844309

Is the Auckland Council still refusing to release its list of affected buildings? It's not only residential property values and the rates that they collect that are being protected by local and central government. Can't imagine the banks would be too happy with a heap of commercial properties being revalued in line with their earthquake risk.

by Dale Smith | 7th Dec 12, 3:33pm 1354847584

It’s so ironic to think that it was deemed imperative to spend millions upgrading the parliament buildings as a first priority a few years ago, but no else has too, because of little economic benefit. Apparently politicians’ ‘economic’ lives are worth saving but not their electors.

by BigDaddy | 7th Dec 12, 5:02pm 1354852926

This earthquake upgrade could make the leaky homes disaster look like a Sunday school picinc,

In fact there are a lot of similarities between the leaky homes mess and this new requirement.

Buildings that now don't comply were once ticked off as safe and secure by the relevant Council at some time in the past.

Now a change in the rules puts the burden on innocent owners and not on the Council that approved the building in the first place.

If it's good enough to claim off Councils for wrongly approving leaky houses then it must also be good enough to claim off Councils for approving buildings that are now "unsafe"

Earthquakes are not a new phenomenon. Councils and their engineers would have known all about them at the time they were built.

Maybe it's time for them to pay their share of past mistakes.

by powerdownkiwi | 7th Dec 12, 5:51pm 1354855886

Having sat on the Planning Committee of a Local Authority, I'll tell you that the pressure brought to bear from developers, and in many cases the massive amounts of ratepayer money needed to challenge them through the legal process, says you're being a bit disingenuous.

Typically, developers produce 'experts' to assure the Councils that all will be well. Perhaps the Councils can blame them?

Who were the developers of the Eastern Suburbs of Chch? Who were their 'experts?

by Chris_J | 7th Dec 12, 5:43pm 1354855406

Not even the tip of the iceberg...

Dunedin alone probably has 4-5,000 unreinforced masonry houses - many will be cheaper to rebuild than reinforce. Auckland has large numbers too. Let's say 50,000 nationwide at an average of $200,000 each to strengthen - that's $10b. Then there are probably 1 in 3 homes with unreinforced chimneys - that's half a million properties each needing perhaps $3-15,000 per chimney to deal with the problem (ie this alone is something like $5b).

Then virtually every commercial building built before about 1930 and most built up to 1980 will probably be below code. A lot of modern buildings are too. Most will not be economic to fix. Conservatively 50,000 buildings at an average $500,000 each is $25b.

Perhaps $40b total??

I see prices of non-leaky, non EQ-prone buildings soaring to accommodate the huge demand from the loss of all this "unsaleable" leaky and prone housing and building stock.

Double digit price gains 2013 for non-leaky, non-prone housing??

by Plan B | 7th Dec 12, 9:26pm 1354868792

at some point we may notice that it is the value of the land that we are building on has dropped in value. It is our land that is the problem. Nowhere in NZ is like building in Sydney harbour or Manhattan Island ie building on solid rock that does not move much if at all. So one day we may realise that to have actual buildings here we are going to have to pay more for the structures and less for the land instead of the other way round.

by Dale Smith | 8th Dec 12, 8:05am 1354907133

Plan B – This is a point that I have been making for a while now. If you work out the value of the land based on its residual value ie market value minus improvements then what’s left is what the land is worth. This is an over simplification of course, but is more correct than thinking that the land value should remained unchanged.

Worse still in Christchurch people think that most land is worth more in value because of supply and demand; even taking into account their land is earthquake prone.

It would seem that supply and demand can raise the value of land more than an earthquake can lower the value. If Christchurch thinks like this, then the rest of NZ is going to be no better.

by Face Facts | 8th Dec 12, 1:36am 1354883782

"There were between 15,000-25,000 ‘earthquake-prone’ buildings in New Zealand, the Ministry said."

Who told the ministy this? The same EQC employed experts who said ChCh was not on a faultline?

by timothy10 | 18th Dec 12, 12:46pm 1355787975

Its a hard ask to expect the building stock built before the 2004 NBS to be strenghened at the expense of the building owners to anywhere near the 2004 NBS.

Older buildings are just that older buildings built to the standards of the day some have been strengthened already to older codes that are now superceeded by 2004 NBS and the standard will increase even further when the next round of Natioanl Building Standards are introduced.

You want new buildings that perform to the latest standards thats marvelous and well meaning but seriously delussional to expect the entire countrys building stock to be upgraded in a short time frame.

Developers will only be to happy to knock down the old dungers and build new up to code buildings but only when the ecomomic propety cycle allows and finance becomes available and not before.

by Dale Smith | 18th Dec 12, 2:25pm 1355793905

Since the extra cost to strengthen a building is attributable to fact that the land is now seen as more earthquake prone, then the building cost is actually a land cost ie when the building has been strengthened the building has not increased in value, the land has decreased in value, and hence the market value has remained the same. Owners of buildings who don’t upgrade, should either get less rent, or depending on who your tenant is and how deficient the building is against the code, may not be rentable at all. Those owners who have the equity need to be rewarded for getting in and making the changes and keeping the value of their investment intact. Those that don’t have the equity or won’t make the changes will take the commercial hit. The tenants have always had to wear the ups and downs of income while the landlord has been protected by their ratchet clause. This is the commercial risk of business.

by timothy10 | 18th Dec 12, 2:53pm 1355795580

Anything up to code will be leased and leased at a premium leaving whats left for the rest of the businesses to fight over, yellow stickered or not it wont effect a tenants decision to lease, if your a location specific business and you want to operate downtown you will take whats on offer if the location/price is right. The most effected sector is commercial buildings and residential apartment blocks so if new builds dont start happening soon there can only be a greater future demand "quiet simple"

by waymad | 18th Dec 12, 3:09pm 1355796575

Oh, how how I blush! Having just revisited one of me old stamping-grounds and discover that ppl have been Talking!

Seriously, though, the thought of a Modest Fee based on an ACC-style Risk Assessment (clerical staff are less inherently accident prone than Loggers, Fishers or Miners to ACC, quite sensibly, so a small timber frame shack is less risky than a multi-storey 60's Glorious Concrete edifice) would be quite feasible.

The thorny questions would be:

where to invest it - can't be supporting Guns, Ammo or Oil if the Greens are involved etc. Chasing any sort of Return in a ZIRP/QE world is a Bit of a Mission...
Who to trust to manage it. The Public sector is a wash - just lookit the West Coast Rail debacle in the UK - and the private sector appears to be rife with Rosses and Madoffs at the low end, and the Squid or pretenders to That throne, everywhere else.

Decisions, decisions...