Not only buildings and houses never to return, says property expert

13 March 2011

Christchurch could soon see noticeable suburban tracts of bare land as owners of demolished houses stay permanently away from the earthquake-ravaged city due to negative equity, a property expert says.

University of Auckland Business School senior property lecturer James Young, who studied the effect of Cyclone Katrina on New Orleans property prices in 2005, says Christchurch could face the prospect of empty lots dotted throughout its suburbs when those needing to rebuild their houses are hit with crippling earthquake insurance premiums necessary to cover bank mortgages.

Whilst no one knows the long-term effect of Christchurch’s reported "mass exodus" of residents to other parts of New Zealand, Hurricane Katrina's effect on the population still impacts on New Orleans today and Christchurch could be at risk for many years as well, he says.

"There are obvious differences in the two situations," Mr Young says. "Christchurch is not a low socio-economic area and it has high levels of owner-occupied property - both of which are different to New Orleans.

"However, New Zealand is not big on Government incentives that attract developers, as we saw in New Orleans, and there will be lots of Cantabrians who, once they get insurance money and their slice of the Earthquake Commission benefit, will realise that they simply don’t have the money to rebuild.

"If they do, the hike in insurance premiums or the cost of modifying their homes to be more resistant to future earthquakes may be so substantial that they could be put off the rebuilding process. Others may face having to pay mortgages when they own only the land that their former houses sat on, which may be worth next-to-nothing anyway.

"We have seen a pattern emerge in Australia after the recent hurricane and flooding, and I believe that if insurance companies don’t play ball and decide to hike insurance premiums up or underpay claimants, we could see the same kind of long-term problems that our American counterparts saw in New Orleans."

Mr Young says the Government may need to offer partial payments for damaged land so that those most affected can walk away. He also believes the Earthquake Commission's maximum payout levels should be reviewed.

While property values will be cut significantly in the short-term, Mr Young says recent homebuyers will be the most vulnerable. "Of course, property values will differ between suburbs, so some people might even see their properties increase in value. A lot will hinge on continuing employment, and the decisions of insurance companies."