By Jenée Tibshraeny
One of the most challenging tasks facing the new government is deciding the extent to which public money should be used to compensate owners of houses damaged in natural disasters, and houses at-risk of flooding, erosion and fire due to climate change.
The previous government commissioned major reviews into the Earthquake Commission Act and Resource Management Act (RMA). Labour has committed to implementing the recommendations at a high level, but is yet to work through the billion-dollar details.
Following the Canterbury Earthquakes, there’s public awareness of the complexities related to deciding how large the country’s state disaster insurance scheme should be, and accordingly, what level of premiums taxpayers should pay to support it.
The new territory we’re about to enter is deciding how to apportion the costs of adapting to climate change. In other words, protecting our homes, businesses and infrastructure from sea level rise, flooding, erosion and fires.
This will mean building seawalls and the like to protect property, but also moving away from risky areas.
The question then is, who - if anyone, should compensate the owners of these at-risk assets?
Managed Retreat and Climate Change Adaptation Act
Labour has committed to drafting and passing a bill in this term of government to address the thorny issue.
The final report of the RMA review, led by retired Court of Appeal Judge Tony Randerson, recommended a national fund be established to cover the costs of managed retreat and adaptation.
It suggested the costs be shared across the country, rather than lumped on affected areas.
The report also recommended government be given the power to acquire land and “potentially” compensate landowners, and “use taxes, subsidies or other economic instruments to incentivise changes in land and resource use”.
It noted land owners in “high-risk situations” where managed retreat is required, wouldn’t be compensated enough under the existing Public Works Act.
The Act requires payment at market value. But if someone can no longer get resource consent or insurance for their coastal property for example, the value of their land would plummet and any market-based pay-out would be insufficient to help them relocate.
Randerson noted this new ‘Managed Retreat and Climate Change Adaptation Act’ would need to avoid creating a moral hazard, and consider both intergenerational equity and the Treaty of Waitangi.
He said it would also need to deal with issues around private insurance and local council liability.
Labour hasn’t specified exactly which recommendations it will adopt.
EQC Act
The party responded similarly to a report written further to a Public Inquiry into the Earthquake Commission (EQC).
This inquiry, led by former governor general Silvia Cartwright, recommended the cap on disaster cover provided to residential property owners increase from $150,000 to the average cost of building a house (about $400,000 at the time the report was written). Alternatively, it suggested removing the cap altogether.
This would see a seismic shift in risk from private insurers to EQC; property owners to the public purse.
The inquiry didn’t include any maths on the extent to which EQC levies that private insurance policyholders pay would have to increase to cover the cost of having such a bolstered state insurance scheme.
Nor did it detail how much of a cash injection the Crown would need to make into the Natural Disaster Fund. As at June 30, the fund was only worth about $180 million.
Cartwright told interest.co.nz she didn’t explore the cost and feasibility of obtaining a lot more reinsurance for the scheme either.
The former government accepted the “intent” of the report and directed a number of government agencies to work towards introducing legislation to amend the EQC Act by mid-2021 at the earliest.
Bigger picture
At the heart of both the EQC Act review and the creation of the Managed Retreat and Climate Change Adaptation Act, is the issue of liability and spreading the cost of risk.
The elephant in the room, is that the government might start using the public purse to protect property owners, who are already receiving mortgage relief and largely untaxed capital gains thanks to the Reserve Bank’s efforts to lower interest rates.
This would be a huge pill to swallow for young people in particular. They’d be helping pay to de-risk an asset class they’re priced out of.
But it gets more complex. The more the government de-risks investment in property (versus other asset classes), the more attractive and thus valuable it becomes.
When basically all our eggs are in the property basket, we’re even more exposed to the risks that devalue this asset. And so, for the sake of maintaining financial stability, there’s an even greater need for us to do everything we can to protect it.
It’s an awfully viscous cycle.
We’ve told mums and dads that taking out a massive mortgage to buy a property they can sell for a premium is a safe investment necessary for a comfortable retirement. Their local council or private insurer can’t now tell them they’ve changed their risk appetite due to climate change, shifted the goalposts and rendered their property worthless. These mums and dads would be crippled.
And so, taxpayers to the rescue!
Various government and central bank policies have created this “too big to fail” housing giant. We now have to keep satisfying its growing appetite to avoid it collapsing on us.
Clearly the government needs to take a long-term, intergenerational approach to EQC and climate adaptation legislation. Changes need to be gradual and well-signalled.
The private insurance/reinsurance sector also needs to be open about how it anticipates pricing risk in New Zealand in the future.
But fundamentally, central government, local government and the Reserve Bank need to come together to consider the direction their housing-related policies are collectively taking the country.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
77 Comments
We need to be clear that there are various instances where govt / local govt has created the risk and/or allowed the sale of land / sections in known high-risk locations.......
In such cases, there is a clear argument for govt /local govt to carry the can. (It's analogous to the leaky homes debacle - but sometimes bureaucrats learn more slowly than the public would like.)
TTP
So you're happy for your Council Rates to go up by 500% to cover that cost? Good idea!
(NB: I happened to be sitting by the waterfront a couple of years back when a Councillor and the architects of redevelopment was being discussed. The take-away bit for me was the Councillor, waving his arms about and telling the architect, "I don't care how much it costs, I just want it to look good!" That's what lots of RV rates does? The project is completed now, and whatever it cost, the Councillors must be disappointed because part of the wider project is being re-built - for the 3rd time!)
NZ government has always supported property investors at the expense of ordinary kiwi homeowners or just renters and so yes, this is going to happen.
There is a tendency of governments to reward reckless behavior. After 2008 financial crisis, which was caused for reckless investment of bankers, they were rewarded. Here is NZ, if you don't want to work, government will take care of you. More reckless you become, more support you get from the government.
Those of us who voted for establishment (Labour or National) shouldn't blame anyone except themselves. Now you have to see how much you pay in taxes to support these crappy policies and how much you can recoup as a property investor. Trust me, most of us will come out as losers.
Council is paying for waterfront properties due to increasing sea levels, people are taking money and still not happy.
https://www.stuff.co.nz/environment/123216408/moving-day-at-matat--the-…
That's a NO.
I don't see a clear argument for council to carry the can for leaky homes (even though that's what happened). I see a clear argument for local and central government to stay right out of this and for home owners and insurance cos to shoulder the risk. I'm sick of most any one with a asset deciding that any risk on their investment should be somewhere else. Bloody communists the lot of them.
Caveat Emptor? perhaps. However that theory then extends to every piece of property in Wellington - the whole city is built on an identified fault line, as is Auckland Central and surrounding areas built on reclaimed land within a known volcanic field. These properties are covered by EQC so why not coastal ones?
I don't think they should be covered by EQC, if you want to live somewhere at high risk of a natural disaster then the increased cost of insurance should fall on you alone.
Not that I expect the government or society at large to share my views. My ideas about personal responsibly seems to have fallen out of fashion.
To me it just seems like moral hazard after moral hazard with no end in sight.
So given NZ in general is now recognised by insurance companies as an overall riskier place to do business you'd be happy to watch offshore insurance companies further gouge us? If the EQC levy was increased substantially and it could be paid directly to EQC as opposed to being part of House Insurance, I think that would be more equitable. At least the money would stay in NZ. I agree with you in regards to personal responsibility but I don't agree with some of the comments here about leaving people to fend for themselves. After all we have ACC where even criminals are provided for - what's the difference?
> So given NZ in general is now recognised by insurance companies as an overall riskier place to do business you'd be happy to watch offshore insurance companies further gouge us?
Given that risk has increased it seems fair and reasonable that insurance costs should increase. No doubt there is some gouging but my uninformed reckons are that insurance costs aren't unreasonable, do you have some examples or figures showing the level of gouging?
> If the EQC levy was increased substantially and it could be paid directly to EQC as opposed to being part of House Insurance, I think that would be more equitable.
Agree, that does seem fair and reasonable, so long as any shortfall that may exist when the shit happens to hit the fan doesn't fall on the general taxpayer.
> After all we have ACC where even criminals are provided for - what's the difference?
I suppose it's down to housing being largely a tax free investment. Almost everyone pays some income tax, probably most criminals included. It seems unfair that housing gains be almost untaxed but whenever some large event threatens those gains it gets covered by everyone, including the ~50% who don't own a house.
The whole socialism for me, steely self determination for thee thing sticks in my craw.
example ihumato, less that two kilometers from a new international runway, so if houses are built now i expect future claims on the council due to noise, nobody else can build a house within 5 kilometers, yet the council changed the zoning of this land from rural to housing ?, the rest of the zone is either industrial or rural and any existing houses have been retro fitted by auckland airport.
if you know the history, the council tried to buy to expand the park and the family refused and refused, next minute it is rezoned ( and now the councilors are saying that should never have happened) then the family sells to fletchers and the government bestows as a SHA all in the space of months.
if it smells it is normally rotten, they say we have very little corruption in nz politics.
the problem now is either way the government and council will pay, either to buy back the land or in future claims if houses are built on it.
Shortly after the Christchurch Earthquakes, estimates of the clean up and rebuild emerged. The first estimate was $5 billion. That grew to $10 billion, followed shortly after to $15 billion. With an enquiring mind I logged on to the EQC web-site to see what their reserves were. Nothing published. No financial accounts. No audited financial statements. EQC had been pulling in a meagre $25 annual premium per property insurance policy for 50 years. It had never been reviewed. Never increased. From public announcements EQC had reserves of $5 billion. End cost of the rebuild was $35 billion. With more to come from AMI wash up.
EQC was a little minnow up a tranquil backwater that nobody looked at. Out of sight out of mind. A bunch of executives pulling in fancy salary packages to mind the ranch. Their job was to keep the ball rolling and pocket the proceeds. No transparency. No annual accounts. Nothing. Nobody watching.
If there was published transparency the Insurance council should have been making noises by 1990
A distinction needs to be made between compensating for the unforeseeable and compensating for the foreseeable. I cannot think why a single dollar of people's money, the taxes paid by you and me, should be used to compensate rich people for the remediation or abandonment of their clifftop or seaside estates that we could never have afforded, when those estates suffer their entirely foreseeable and predictable fates.
you can debate as much as you want. You are preaching to the choir.
The total number of commenters on this platform aren't more than a few hundreds. That's all.
Government will support and compensate investors, one way or other. Sooner you understand that, happier you would be.
We’ve known about climate change for decades now. There’s been a long time for people to price it into their purchase of expensive coastal property. I’m sure, being largely a sophisticated cohort who invest cannily for deserved returns, they’ve already priced those risks in. Right?
There is billions of dollars worth of commercial property which would fall into that. Have a look at the Auckland CBD for a start, Wellington, Picton, Tauranga and the list goes on. It's not just about private property which some very mean spirited and myopic commentators here are assuming.
Its probably the same people who claim global warming isn't real who buy such properties (50% fake news). You know, those reasonably wealthy boomers who want to live close to the water, but don't think burning fossil fuels does any harm to the planet, nor would cause the earth to warm up, nor sea levels to rise, nor for their ocean front home to get whacked by the occasional king tide as a result (50% sarc).
Wonder if insurance covered any of that interesting Browns Bay case
A new home sitting at the edge of an eroding cliff face on Auckland’s North Shore is the fifth house built on the site. At the eastern end of Beechwood Rd, properties 40 and 42 perch above Browns Bay. The clifftop has a panoramic view over the Hauraki Gulf, but its tranquil locale is seemingly in contrast to the perpetual building site it has become
During construction of a house there is no management of stormwater. One house was removed to another location. Next was demolished and rebuilt only to be a leaky home. it was demolished and rebuilt. Chinese bloke bought it and rebuilt. His wife came over for a look-see. She didnt like it, so it was demolished again and the rebuild which occupies the entire site sits there unconnected to the stormwater
Meanwhile the bloke next door is losing his house also - interesting read - stand by for a civil-legal case and wonder if the next door neighbour will ever be compensated
https://www.stuff.co.nz/environment/climate-news/122139218/auckland-hom…
Imv the council or engineers should have exercised some common sense or caution during any geotech exercise. There were a couple of comments from long time residents about how the area those houses were built on used to be reserve - for obvious reasons. I think that in the event of litigation, the council may find itself on the hook for some measure of culpability. As you say - an interesting case.
It's a Building Act matter, sections 71-74;
http://www.legislation.govt.nz/act/public/2004/0072/latest/DLM306818.ht…
These caveats can be issued on land titles where there are natural hazard risks (slippage and subsidence being two of those hazards listed). If AC has not used this provision - they are extremely negligent. But frankly, I cannot imagine them not using it - as it is very commonly applied.
Once the title is caveated the owner/developer is on their own (i.e., has accepted the risk in full).
I do not know why this proposal for an EQC-type fund for mitigation of coastal hazards has got as far as it has where private property is concerned. I can understand some form of public fund for public works, but definitely not needed for private buildings/land.
Don't compensate them, they've chosen to purchase these sites so they should accept the risks. Chances are they're already wealthy too given the locations.
It's not like they haven't been warned by scientists over the last four decades so they can hardly claim ignorance on this issue.
If anyone wants to see what a council managed process for "retreat" looks like, read up on the Matata (Awatarariki fan) Managed Retreat. I used to own a large beach front section there. About two years after I bought it the Regional Council redrew the Coastal Hazard Zone which moved the Inundation hazard zone inland by 100 mtrs using a "desktop hazard assessment model" . End result was my section which wasn't deemed under threat when I bought it suddenly was under threat in it's entirety. Rules change constantly so many long term owners may be caught out. Imv the EQC levy should rise to cover the costs of action - probably 10 fold
As I said elsewhere, I don't see a clear and logical argument for making council responsible. Their mantra should be all care no responsibility, owners need to shoulder the risk and the risk will change over time. I know it's anthems to many in society now days, but personal responsibility is a thing.
As above, the land (even though now designated as in a hazard zone) should be able to be built on provided in seeking Building Consent you agree to the Building Act section 74 caveat. Problem arises for land owners when they need a mortgage as banks won't normally lend on the development unless insurance can be arranged. But there are many people who choose to go without, i.e., self insure and build anyway. The caveat remains on the title permanently.
Many of the comments and many arguments here and elsewhere concentrate on the sea. The gist of the article goes way way beyond that and basically covers any disaster that can remotely be blamed on nature. Landslides, floods, storm damage, erosion, shifting sands, the list is endless as obviously are the money printers.
Being a farmer, I'm at constant risk from the climate and it's just a normal part of life. I don't expect to see any govt dollars coming my way for adaptation or mitigation. I have to think carefully about what I'm doing and make good decisions. I'm seeing a lot of development in town, that is <1m above sea level. I basically came to the conclusion that nobody in council or involved in the development, actually believes in climate change. Maybe they are right and there is nothing to worry about, time will tell.
People have to assess the risks. In my town the council requires people put on their title that they are in a flood zone from the river, before issuing a building consent on a new house.The owner is then taking the risk of building on that land. People need to take responsibility. I intentionally decided not to buy a house near the sea and lower lying, because I could see the risk that rising sea levels presented.
Fifteen kilometres north of us is a small coastal hamlet. The coastal road runs straight through it. There is a coastal strip about 50 metres wide between the road and the sea. At best 5 metres above sea level. In the last 5 years 5 new palatial mansions have been built on sand. 500 sqm $2 million ostentatious mansions. No expense spared
Breathtakingly insane
Well that's the same attitude I have to ACC paying out on sporting injuries so I guess there is some common ground after all. Or people who ride motorcycles and push bikes - known increased level of risk so the expense should be on them - take out private insurance cover and reduce the levies.
So you've inadvertently bolstered my argument - you pay an increased levy into a public pool. Why should that not be the same for coastal hazards? Your extra $400 or so certainly wouldn't cover the costs of any medical treatment should you have a serious spill, it wouldn't even cover the cost of the ambulance to attend. Your argument promotes you only paying $109 for the rego but being required to pay for private accident insurance - no insurance and you foot the entire treatment bill AND loss of earnings. As you said - "sucks to be you - that's life"
As long as the increased levy is paid only by owners of coastal property and the levy is enough to entirely cover the cost of the managed retreat then I agree. Though in that case I don't see the benefit of pooling the cost - Someone with a seaside shack will be overpaying and a waterfront mansion would be underpaying.
My understanding is that the government is talking about the cost possibly going to council rates or general taxation which seems massively unfair to people who didn't make the poor choice of buying a waterfront property. It seems like a moral hazard, what disincentive is there for people to continue buying waterfront properties?
The council's increased levy for assets under potential threat would be paid for by rate increases no doubt. There has been reports recently about exactly that for increased flood protection around the country which is linked in to "climate change". Just another "Targeted Rate". As for privately owned dwellings or commercial buildings an increase in the EQC levy would be the easiest to administer but it'd be across the board on all insurances.
As I don't pay private insurance it doesn't affect me but I have the financial wherewithal to rebuild if I had to. It's a risk I'm prepared to take.
The difficulty arises when the timescale is unknown - is it 20yrs or 50 or 100 or is it 5? As to the general "fairness" of rates that's a moot point. I pay Targeted rates for several community schemes in communities I will never live in - it's just how it is. The tax/rating system is about being "equitable" - not "equal", it's just that some are more equal than others - that's capitalism.
Rates based on CVs are essentially a form of wealth tax. There is nothing fair about that form of rating system. But councils have been doing it for years, and there hasn't been that much protest. Maybe because house prices have been increasing so much to compensate for it.
> Your extra $400 or so certainly wouldn't cover the costs of any medical treatment should you have a serious spill, it wouldn't even cover the cost of the ambulance to attend.
And nor should it, I'm not having a serious accident every year or taking an annual ambulance ride. The $400 should cover the cost of medical treatment divided by the probability that on any given year my bike and I may have a sudden and unexpected parting of company.
My hope and assumption is that the actuaries at ACC have done their job correctly and that $400 is an accurate representation of that risk.
"My hope and assumption is that the actuaries at ACC have done their job correctly and that $400 is an accurate representation of that risk." - It's probably a reflection of the number of riders/cost of accident. A serious accident requiring treatment plus the costs of rehab and the repayment of lost earnings would far outweigh a lifetime of rego's. I suspect the increased rego was a balancing act between cost and acceptability - I remember the uproar when it was brought in.
The whole of Papamoa is like 5 meters above sea level and there are things like possible Tsunamis caused by the Kermidic trench in your property files. I guess thousands of people just dont worry about that stuff. Me personally I get out my GPS and start looking at the elevation above sea level.
according to the stats it is 16 meters above sea level at the moment , and the dunes are at 8 meters , so why the council decided its fine leaves future generations at risk if you believe in climate change.
it is a huge tsunami risk and research into NZ history has been uncovered that NZ has been hit by huge tsunamis, Maori history tells us they moved from shoreline habitats to hills by the coast, why, they learned it was not a good idea. yet the council lets housing sub divisions to be built there
if you go up north you will hear the history of the buried gum fields that were created when tsunami washed over and destroyed the forests, they think there are up to three forests buried and all the trees are lying in the same direction
https://en.wikipedia.org/wiki/List_of_tsunamis_affecting_New_Zealand
The country is full of stupidity. Why should Auckland be constantly soaking up the lion's share of the NZTA budget? Why should those who make stupid decisions get a weekly welfare payment? Why should taxpayers bail out idiots who do dumb sh1t daily via ACC? Why does the taxpayer subsidise idiots like Billy TK to run for parliament?
Being a contrarian on many things, my views are not always popular with the masses.
But here goes. I've lived on the coast for many years, and over that time have paid close attention to the coastline. And acquired knowledge of local climate history, and local geological processes. There are many hundreds of beachfront dwellings here, extending kilometers north and south. It's a sandy coastline. Some were built in the 1920's. In 1979 an old home was lost to the sea, during a storm of that year. And prior to this someone's beachfront tennis court was lost, (during the late 1930's). At a time when two tropical cyclones passed within weeks of each other. Note that no properties have been lost since. So really, on this basis there isn't much to support a trend towards radical changes on NZ coastline.
The best people to make those policy decisions, are those who live on the NZ's coastlines. It's important, that risks are not overstated or embellished into something they are not. What also needs to be understood are the inherent risks of the policies themselves. And how they can potentially damage these neighborhoods and arbitrarily penalize those who choose to live in them. More than the present observable trend indicates.
Will the government bail out banks and reimburse savers fully if a bank goes under? No they aren't beucase they removed the government guarantee . So why should they bail out home owners in areas that are in high risk locations from this? . People who have purchased a house in the last 10-20 years near the sea have known about rising sea levels for years.
The new govt, should seek the advise from Mr. John Key & Mr. Gerry Brownlee independently - Their expertise input as the major Chch rebuild experiences will be invaluable in this sense. After all if you're in majority, no need to worry about passing on the legislation etc. - though red team need less opposition criticism & must get across the beehive floors approval to do something about it.
The private insurance process is the most effective way to manage the necessary climate change retreat, as is progressively happening in ChCh where inundation exposed properties are becoming increasingly harder to fully insure. It is also happening in respect of earthquake risk where cover is now restricted and premium rates prohibitive for unreinforced masonry construction. A combination of council rezoning and the insurance market will over time deliver the needed result. Socialising the risk, including through the crazy proposal to increase the EQC cap to $400K, would slow this process down considerably.
The whole planet - and in particular the global North and its rapacious consumption - is dysfunctional.
And left to its own devices (it was) it is on the cusp of failing, no assistance required.
Why so many folk have to blame this or that ideology, rather than address the truth, is an interesting question?
But the bigger question is: What now? And NO politician, no member of the NZ media and a mere handful of academics (sort of) are addressing that. Every now and then we get a whiff from elsewhere - https://www.jonathan-cook.net/blog/2020-10-25/capitalism-double-billing/
Interesting times
You have got to be kidding me. Yeah let's give rich litigious coastal property owners the opportunity to claim for every dilapidated retaining wall or loss of coastal garden to predictable coastal actions.
While the average Joe probably has legitimate storm damage on their modest suburban home that they would never know they can claim from EQC for and are just so grateful to have a huge mortgage on something they partially own themselves that they pay for the repairs themselves.
I worry that our country is broken if we are seriously considering this.
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