The reverberations of the Christchurch earthquake continue to be felt, and not only by Canterbury people. Building owners around the country are also experiencing the after-effects of a $30 billion calamity. Owners of buildings used by the public are facing the prospect of having to close them unless they are upgraded to new earthquake standards. Most of us are now paying much higher insurance premiums, and some can’t get earthquake cover at all.
This is not just an urban issue. In my rural area, among the buildings affected are:
- an old stone church, closed and unlikely to reopen because of the upgrade costs;
- a public hall, closed, waiting assessment;
- a historic bank building, closed, undergoing strengthening;
- a substantial school building, condemned, being demolished with students and teachers working out of prefabs; and
- the local council office, partly closed and being strengthened.
Napier and Oamaru are facing steep bills for the costs of upgrading their respective distinctive architecture. In towns and cities up and down the country, up to 40,000 buildings could be affected – an eighth of our total stock. It’s a massive headache for councils, non-profit organisations, businesses and the Government as they work out how or whether to meet the cost of fixing buildings while also funding huge increases in insurance costs. In the meantime, the value of their assets falls. Some argue tough new standards are a hysterical overreaction to the Canterbury earthquakes, given many have stood solidly for decades. Well, guess what, folks – the same was said in Christchurch before the quakes.
The even more bitter irony is people questioning why building regulations are now so tough while condemning the lack of safety requirements applied at Pike River. How does that logic work? The focus of the tougher rules is on public and heritage buildings. Sadly, some older buildings will be demolished because the cost of strengthening is just too high. But we can’t in one breath bag lax controls at Pike River and in another squeal that we’re being too tough on building safety. Buildings meeting less than 30% of the building standard are 10 times more likely to fail in a moderate earthquake. That means people in them during a tremor have a much greater chance of dying. We’ve seen that happen with 100,000 damaged Christchurch properties – previously regarded as a lower earthquake-risk area.
Meanwhile, the huge rises in premiums reflect insurance companies passing on the skyrocketing cost of reinsurance. That’s not surprising when you consider the combined financial cost of events such as Hurricane Sandy, the Australian floods and the Japanese earthquake and tsunami. The current spike should eventually retreat, but in the meantime it’s proving painful. So, what are the options if you have a safe building but face huge premium increases?
In many countries, people don’t insure for earthquakes; for example, in California only one in eight do and it’s generally not required for mortgages. But you take the risk: if your house is destroyed, you still have to pay back the money you’ve borrowed. The chance your house will be a write-off is low but the worst-case effects would be financially traumatic. If you don’t have a mortgage, you might choose not to insure for earthquakes – lenders here generally require insurance. You might opt for a larger insurance excess; some insurers here are already imposing that. In the US, it’s common to be liable for, say, the first $40,000 of damage before insurance kicks in.
The worst situation is not being able to get insurance at any price, a problem being worked through here. It’s good to see investment guru Warren Buffett’s Berkshire Hathaway offering to provide insurance here, including in Christchurch. We’re lucky to have the Earthquake Commission, even though the taxpayer will need to stump up the $1.6 billion shortfall from Christchurch. Investors now are looking more carefully at the potential risks of a building and paying a premium for lower-risk, higher-quality properties – and discounting the price of the rest.
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