Diminution of Value Methodology for Increased Flooding Vulnerability. APRIL 2014 (updated with Guidance notes and minor amendments as at March 2015)

Transcription

1 Diminution of Value Methodology for Increased Flooding Vulnerability APRIL 2014 (updated with Guidance notes and minor amendments as at March 2015)

2 TABLE OF CONTENTS (A) EXECUTIVE SUMMARY 1 (B) BACKGROUND NEED FOR A METHODOLOGY 3 (B1) Purpose 3 (B2) Statutory context Earthquake Commission Act (B3) Increased vulnerability damage 4 (C) KEY PROBLEMS IN DETERMINING A DOV 6 (C1) Lack of information about the land damage in the market 6 (C2) Timing no ability to wait for market to become informed 6 (D) DEFINING THE VALUATION OUTCOMES SOUGHT 8 (E) ASSUMPTIONS (LEGAL AND VALUATION) 10 (F) BACKGROUND CANTERBURY MARKET AND EARTHQUAKES 12 (F1) The Canterbury earthquake sequence 12 (F2) Post earthquake land classifications 13 (F3) Nature of Canterbury land market before and after the earthquakes 15 (G) INCREASED FLOODING VULNERABILITY 19 (G1) Introduction 19 (G2) Increased Flooding Vulnerability 19 (G3) Options to reduce or eliminate impacts of IFV damage 24 (H) RELEVANT VALUATION PRINCIPLES AND STANDARDS 26 (H1) Introduction 26 (H2) Basis of valuation market value 26 (H3) Methods of valuation for assessing market value 27 (H4) Use of market perception surveys 33 (I) INPUTS TO VALUATION METHODOLOGY OVERVIEW 35 (J) MARKET SALES EVIDENCE CANTERBURY 36 (J1) Introduction 36 (J2) Impact of vulnerability to flooding on Canterbury property values prior to the earthquakes 36 (J3) General trends in land and property sales in Canterbury after the earthquakes 38 (J4) Market information regarding IFV damage 38 (J5) On-going trends in sale of IFV land 42 (K) MARKET SALES EVIDENCE OTHER NEW ZEALAND AREAS AFFECTED BY FLOODING VULNERABILITY 45 (K1) Introduction 45 (K2) Description of process followed 45 (K3) Kapiti Coast 46 (K4) Thames Coast 48 (K5) Feilding 49 (K6) Te Aroha 49 (K7) Conclusions 50

3 3 (L) MARKET SALES EVIDENCE INTERNATIONAL EXAMPLES OF AREAS AFFECTED BY NATURAL DISASTERS 52 (L1) Introduction 52 (L2) Analysis of international studies 52 (L3) Conclusions 57 (M) COSTS OF OPTIONS TO REDUCE OR ELIMINATE THE IMPACT OF THE DAMAGE 59 (N) THE PILOT 60 (N1) Establishment and planning 60 (N2) Selection of Pilot properties 60 (N3) Engineering work undertaken 60 (N4) Operations work undertaken 62 (N5) Valuation work undertaken 62 (O) THE METHODOLOGY 63 (O1) Introduction 63 (O2) Valuation Data 63 (O3) Valuation Process 64 (P) BIBLIOGRAPHY FOR SECTION (L) 72 APPENDIX 1 APPENDIX 2

4 1 (A) EXECUTIVE SUMMARY 1 This paper describes the methodology developed by the professional valuation advisors to the Earthquake Commission (EQC) in conjunction with legal and engineering advice to determine what, if any, reduction or diminution in value (DoV) of residential property has resulted from what is defined as Increased Flooding Vulnerability (IFV) to insured residential land under the Earthquake Commission Act The methodology has been developed for the purpose of enabling EQC to settle residential land claims for IFV damage on the basis of a payment of the DoV, in circumstances where the DoV of the property is the most appropriate measure of the insured s loss as a result of the IFV damage, rather than the cost of repairing that damage. This will be the case, for example, where no repair is technically feasible or where resource consent for the repair cannot be obtained under the Resource Management Act For these purposes, the methodology must assess the DoV caused by IFV damage that is, the change in a property s vulnerability to flooding as a result of subsidence to insured land. 4 Other matters which may affect the value of insured property as a direct or indirect result of the Canterbury earthquakes are to be excluded from the DoV. Accordingly, the DoV must exclude any value reduction as a result of increased vulnerability of insured property which is not due to subsidence of the insured land (for example, as a result of the Heathcote River mouth rising due to the earthquakes), and exclude any value reduction as a result of general market uncertainty following the earthquakes, stigma, and decisions by regulatory authorities regarding services. 5 The methodology described in this paper enables expert valuers to assess the DoV, in absolute dollar terms, that an insured property has suffered from its value immediately prior to the first earthquake of 4 September 2010 as a result of IFV damage caused by the Canterbury earthquake sequence. The methodology has essentially four parts: 5.1 Identification of an appropriate percentage adjustment (if any) for increased flood vulnerability; 5.2 Determination of the pre-earthquake (September 2010) value for the insured property, using conventional valuation techniques; 5.3 Application of the percentage adjustment to the pre-earthquake value of the insured property; and 5.4 Exercise of valuation judgement as to the resulting DoV, including a check against estimated repair costs (where available). 6 A matrix of DoV adjustments for flood vulnerability has been developed from sales evidence of flood prone properties in Christchurch and other areas of New Zealand, and a review of international literature on the impact of increased vulnerability to flooding on property value. The matrix enables calculation of a DoV adjustment depending on the key characteristics of the increased flood vulnerability: changes to severity of flooding, changes to frequency of flooding, and any over-riding

5 2 positive attributes of the property which reduce the impact of the increased flooding vulnerability on value. 7 Use of the matrix to determine DoV adjustments will ensure the consistent and principled assessment of DoV across properties that have suffered IFV damage. However, the matrix does not exclude the need for the application of valuation judgement to a particular property to ensure the DoV assessed is a fair reflection of the extent of damage and has appropriate uniformity. 8 The methodology has been tested in a pilot project of approximately 130 properties with potential IFV damage in Christchurch, and determined to be robust. 9 EQC s valuers principally responsible for this report, and the development of the DoV methodology for IFV damage, are: 9.1 Dave Townsend FNZIV, FPINZ, is a registered valuer who works for his own company and has been involved in the valuation and property consultancy industry for the past 34 years. Dave is a contractor to, and advises, EQC on a range of valuation matters. Working as a contracted Lead Valuer with EQC often involves working with and advising local valuers in the event of specific land value issues that arise throughout New Zealand; 9.2 Ken Blucher is a registered valuer and Senior member of the New Zealand Property Institute (SPINZ) with over 34 years valuing experience. Based in Wellington, he is a Director at Darroch and has a wealth of experience with respect to EQC claims, compensation work, disposal of surplus Crown properties and Treaty settlements acting on behalf of the Crown. Ken also advises clients on various legislative matters, specifically relating to rating. Ken has been a key member of the valuation team assisting EQC with property and valuation policy advice in Christchurch, since September 2010 through to the current day. He is currently Valuation team leader with respect to the assessment of properties with IFV and ILV; and 9.3 Chris Bridges ANZIV, SPINZ, is a Christchurch based Registered Valuer with 33 years experience in valuation and property advice. Chris manages his own company, and provides valuation advice to EQC on a range of matters. He is a key member of the team that has developed the methodology for DoV valuation. 10 The methodology and the results of the pilot project have also been reviewed by the independent Expert Valuation Panel appointed by EQC. The Expert Valuation Panel comprises four senior members of the valuation profession nominated by the Institute of Valuers and the Property Institute of New Zealand. The Expert Valuation Panel has approved the methodology as an appropriate methodology for assessing the DoV caused by increased vulnerability to flooding that accords with accepted valuation standards and practice...

6 3 (B) BACKGROUND NEED FOR A METHODOLOGY (B1) Purpose 11 The purpose of this paper is to explain the development of a methodology to determine what, if any, reduction or diminution in value (DoV) of residential property has resulted from what is defined as Increased Flooding Vulnerability (IFV) damage. This is to be used as an alternative basis of settlement for land claims, rather than the cost of repairing that damage. 12 This paper and methodology addresses only IFV damage. As IFV damage only affects the flat lands of Canterbury (rather than the Port Hills), this paper is confined to the assessment of DoV for flat land properties. 13 Ordinarily, EQC does not settle land claims by reference to any actual or perceived DoV of land damaged by a natural disaster. Rather, it settles such claims based on the estimated cost of repair. However, the particular circumstances that have arisen in relation to the Canterbury sequence of earthquakes have led to the need to consider settling claims by reference to the DoV to the property caused by the damage to the land resulting from the earthquakes. 14 Accordingly, EQC has decided to develop a methodology to provide a consistent framework for the assessment of any DoV to property resulting from IFV damage caused by the Canterbury earthquakes. 15 The methodology and this paper reflect a combination of valuation, legal and engineering advice provided to EQC. (B2) Statutory context Earthquake Commission Act EQC provides statutory insurance for residential buildings and land (where the buildings have private fire insurance), for damage resulting from a natural disaster. The scope of the cover is set out in the Earthquake Commission Act 1993 (the EQC Act). 17 As regards land, EQC covers the land on which the house is situated, 8 m around the house (and any appurtenant structures such as sheds), the main access way (up to 60 m from the house) and land supporting that access way. 18 EQC provides building cover, in general, up to $100,000 (plus GST) for each earthquake event. There is no equivalent fixed cap for land cover. Instead, EQC insures the land up to a maximum amount, being the value of the smaller of certain areas, which will typically be the area of the land damaged or lost, or the minimum lot size for an equivalent residential purpose under the District Plan applicable to the property. 19 EQC may settle claims, up to the maximum amount, by way of payment, replacement or reinstatement at its discretion. In the past, EQC has settled land claims either by payment or reinstatement. Where it settles by payment, the payment has been calculated by reference to the cost of reinstatement or repair (subject to that amount not exceeding the maximum amount). Where land has been lost, for example by landslip, EQC has paid the maximum amount, being generally the value of the area of land lost.

7 4 20 The EQC Act does not expressly state how a settlement by payment is to be quantified. As noted previously, ordinarily EQC would quantify this payment by reference to repair costs. However, EQC has determined that the DoV of the property may be an appropriate basis to settle land claims in certain circumstances, primarily where no repair is technically feasible, permitted or likely to be permitted by applicable regulatory requirements, or the repair costs will not in fact be incurred by the insured. This last scenario is most likely to occur in situations where repair of the land requires removal of an otherwise undamaged or repairable house, but is not limited to these situations. (B3) Increased vulnerability damage 21 The Canterbury earthquakes have resulted in certain types of land damage that may not severely impact the owner s present ability to use the land, but which have made the land more vulnerable to certain future natural disaster events. 22 These types of land damage result largely from the lowering of ground levels compared to the ground water table. This in turn has increased the land s vulnerability to future natural disasters, namely flooding and liquefaction in the event of another significant earthquake. These types of land damage have been classified as: 22.1 Increased Liquefaction Vulnerability (ILV); and 22.2 Increased Flooding Vulnerability (IFV). Increased Liquefaction Vulnerability 23 In the case of ILV damage, the land has become more vulnerable to future liquefaction events because a reduction in the height or level of the land has resulted in a thinner crust. This makes the land more prone to liquefaction and less able to support the weight of a house in a future earthquake. 24 To reinstate or repair land that has suffered ILV damage, it will be necessary to strengthen the ground by effectively recreating or replicating through other means the lost crust. EQC is undertaking trials of various strategies to repair ILV damage. Increased Flooding Vulnerability 25 In the case of IFV damage, the land has become more vulnerable to future flooding events because of a reduction in the height or level of the land. This flood vulnerability can arise either from rivers, rainfall and/or the sea. 26 To reinstate or repair land that has suffered IFV damage, it will be necessary to raise the level of the ground where practicable. In some circumstances it will not be practicable to repair the land in this way, either because a repair is not technically feasible or because a technically feasible repair cannot be undertaken consistent with current planning requirements. 27 This type of damage, the remedial work required and the method of assessing the vulnerability of the land is described in more detail in section (G2) below. Difficulty of economic repair 28 In the case of IFV damage (and potentially, subject to the current trials being undertaken, ILV damage), there are practical difficulties involved in repairing the land, which are exacerbated because it would often be necessary to undertake

8 5 certain enabling works to carry out any repair work to the land (whether ground strengthening or raising the land). These enabling works include matters such as temporarily removing, or demolishing and rebuilding, an otherwise undamaged or repairable house in order to enable land repairs to be carried out. 29 The high added costs of these enabling works will often mean that such repair work is unrealistic and unlikely in fact to be undertaken by a landowner.

9 6 (C) KEY PROBLEMS IN DETERMINING A DOV 30 In determining whether a property has suffered a DoV, valuers would normally look to the market and recent sales of relevant properties. If this exercise were undertaken in some years time, there may be sufficient relevant sales for valuers to assess this reduction. However, even in the future, there would be difficulties in isolating the relevant elements of the market sales that EQC is trying to measure. 31 In any event, that is not currently possible because the market is only beginning to become informed about IFV damage, and therefore the sales that have occurred and are occurring do not yet reflect the impact of the physical change that EQC is trying to measure. (C1) Lack of information about the land damage in the market 32 While there is a growing awareness within the Canterbury market of the fact that land levels have changed as a consequence of the earthquakes, the public is not fully aware of the extent of those changes and its consequences in terms of the increased vulnerability to liquefaction and flooding. EQC has made announcements regarding the existence of IFV as a form of land damage, but it is not yet known which properties are affected or to what extent. 33 It is known that certain areas are more prone to flooding than they were previously. In the most extreme cases, this is visible from the level of nearby rivers, or from the spring tide flooding that has occurred since the earthquakes. However, in most areas, it is not possible to know how a particular property has been affected and to what extent without analysing land height changes and the results of flood models, comparing the pre-quake and post-quake situation. 34 Christchurch City Council has undertaken extensive flood modelling work since the earthquakes, which is now publicly available. However, the flood models used by the Council, compared to the flood models developed before the earthquakes, also include changes to flood levels due to more sophisticated modelling and the inclusion of climate change effects, as well as changes in ground level to land other than the insured land (e.g., risen river beds) resulting from the earthquakes. As these changes do not result from physical changes to insured land, any increase in vulnerability to flooding due to these changes is not damage for the purposes of the EQC Act. The flood modelling adopted by EQC includes the increased sophistication and accuracy of the Christchurch City Council s flood modelling for both before and after the earthquakes, and other changes are excluded as much as possible from the engineering assessment of whether a property has suffered IFV damage. The result is that the increases in vulnerability indicated by the public Council flood mapping do not correlate directly to IFV damage recognised by EQC. (C2) Timing no ability to wait for market to become informed 35 As time goes on more information will be available about which properties have been affected, and to what extent, by IFV damage. As this information has become available, it has been taken into account. 36 However, the international literature shows that it can take years for a market to adjust to such changes. This experience has been confirmed in Canterbury where nearly four years have passed since the first earthquake, and knowledge about the effects of the earthquakes on land in terms of flood vulnerability is still evolving, as is its impact on market values.

10 7 37 However, EQC is not able to wait until reliable market information is available to provide answers. Instead, it must settle claims within a reasonable time period. Because of the scale of the damage caused by the earthquakes and the number of claims, the time before claims will be settled is already much longer than is normally the case. EQC, therefore, needs to develop a methodology to assess DoV in the absence of this market evidence.

11 8 (D) DEFINING THE VALUATION OUTCOMES SOUGHT 38 The objective of the methodology, therefore, is to provide, for each parcel of insured land with IFV damage, a dollar value for the DoV of the property resulting from that damage. 39 More specifically, the objective is to assess the discount from the price that would have been paid for a property on the day prior to the earthquake that would be agreed between a willing buyer and willing seller because of the specified physical change to the land, with full knowledge about that change and its impact on the vulnerability of the land to flooding, and the costs of repair options, and advice from competent and reasonable advisors recommending any course of action. 40 The key elements of this objective can be broken down as follows: 40.1 Discount: EQC is not attempting to assess the value of the property, or all changes in value after the earthquake; EQC is only assessing the change in value resulting from certain physical land changes. The total change to the property value may reflect impacts for uncertainty, stigma, externalities, etc. which need to be disregarded Property: The DoV is that of the property (land and improvements), to the extent that it arises from IFV damage to land insured by EQC. While in this context, EQC is assessing the DoV in order to settle claims of damage to land only (the building insurance being separate), the damage to the land affects the value of both the land and the buildings on it, as they are also directly affected by the increased vulnerability represented by IFV damage. Accordingly, the financial loss to an insured person as a result of the land damage includes the impact of that damage on both the value of the land itself, and the buildings on the land The day prior to the earthquake: The DoV is the discount from the value of the property immediately prior to the earthquake. That reflects the value of the property when the damage occurred Willing buyer and willing seller: The objective is still to determine, as much as possible, what value would be attributed to the physical damage in an open market transaction Specified physical change: EQC is assessing the DoV that results from physical changes to the land, specifically IFV damage (increased flooding vulnerability) Full knowledge: While the details of the physical changes were not ascertained immediately after the earthquake (and were not for some time), those physical changes (including increases to vulnerability) had already occurred. The market participants are taken to have full knowledge of those changes and their impacts (other than on value). This does not entail full knowledge of every detail regarding the land, changes, repair options and costs etc., but rather the level of detail a reasonable buyer and seller would obtain from relevant experts.

12 Reasonable advisors: EQC compensates for loss as a direct result of land damage; it does not compensate for regulatory changes made following the earthquakes (e.g. decisions regarding the maintenance of services in the Red Zone). The assessment of DoV will therefore not take into account future known or potential regulatory changes that have occurred after the earthquakes. However, an assessment of the DoV may reflect future steps that a property owner may reasonably wish to take as a result of the change to the land (e.g. raising floor heights in any future rebuild). 41 Aspects of the above are elaborated on in the assumptions section, below. One DoV assessed for earthquake series 42 The EQC Act responds to damage caused by each natural disaster event separately. However, as the valuation of a DoV for IFV is a difficult exercise involving the application of a multifaceted methodology and then valuation judgement based on limited market information, EQC s valuers consider that it is necessary to value the effect of all IFV caused by the entire earthquake sequence. Due to the variable and often insignificant change from one event to another, this provides a truer assessment of the property s loss of amenity and value. This is because, in general, the change across the sequence will be larger and the loss of value more confidently and accurately identified. 43 Accordingly, the valuation of DoV will be undertaken for each property to reflect the discount in value arising from all IFV caused over the full earthquake series since 4 September Any apportionment of the DoV to specific earthquake events is a matter being considered by EQC, and does not form part of this paper.

13 10 (E) ASSUMPTIONS (LEGAL AND VALUATION) 44 This methodology is based on a range of legal and valuation assumptions. EQC s legal advisors and valuers currently consider that assumptions will need to be made in relation to matters listed below. These assumptions are likely to be valid and appropriate at the time that valuations for Canterbury earthquake damage are completed, and given the nature of the land insurance provided under the EQC Act. The assumptions are as follows. Date of valuation 45 The DoV is to be assessed as the reduction from the property value immediately before the earthquake on 4 September In practice, the value on 3 September 2010 is used. Willing buyer and seller 46 The DoV is based on the standard valuation assumption that the value is the exchange value between a willing, but not anxious, seller and a willing, but not anxious, buyer. Basis of valuation 47 The value immediately before the September earthquake will be the Market Value (MV) of the insured property where reasonable comparable market indicators are available. 48 The DoV will be based on a market value that uses a set of assumptions as to what is to be valued. This assumptions based market value is unable to draw on directly comparable market sales given the absence of information regarding IFV damage in the Canterbury market to date, and the difficulties in isolating the impact of IFV damage from other earthquake damage suffered by the property. Instead, the assumptions based market value will draw from evidence of market sales in Canterbury following the earthquakes, around New Zealand and internationally concerning the impact of the risk of natural disasters. It will not take into account any short term stigma which may temporarily affect property values. Insurance 49 This methodology proceeds on the assumption that insurance will be generally available to properties affected by IFV damage, other than in the most extreme and rare cases (for example where a reduction in the height of the land means that tidal impact may now cause that land to flood on an almost daily basis). EQC s valuers are comfortable that this assumption is appropriate, and that, where the assumption requires relaxing in the case of properties with extreme IFV damage, this can be taken into account in assessing DoV. Finance 50 It is also assumed that finance to purchase a residential property will be available on normal terms for any property for which insurance is available. Public availability of information regarding flood vulnerability 51 Flooding vulnerability as assessed by Christchurch City Council of each property will be disclosed to buyers and sellers through Council published flood maps that will

14 11 also be used by the Council for the purposes of the Land Information Memoranda (LIM) 1 and Project Information Memoranda (PIM) As is explained further below, these flood maps differ to those used by EQC to determine which properties have suffered IFV damage for the purposes of the EQC Act. EQC has considered whether the effect of flood vulnerability on the value of properties ought to be determined by both the change in actual flood vulnerability and any change in the status of land in Council flood maps. However, the valuation evidence discussed further in sections (K) and (L) below, showed that the market value of a property is not materially affected by it being in a flood mapped area but rather by knowledge of its actual flood vulnerability. Accordingly, IFV is to be assessed solely on the basis of the actual increase in flooding vulnerability on each insured property. DoV to only reflect IFV damage 53 The DoV will be the reduction in value resulting only from physical changes to that residential land assessed by EQC as IFV damage. It will not therefore reflect any changes in value resulting from external changes or effects, whether from the earthquakes or otherwise. Equally it will not reflect changes in value due to increased knowledge of pre-existing vulnerability as against increased vulnerability due to the earthquake damage. For example: 53.1 Operational services: It will not consider whether the property has, and will continue to have, operational services such as roading, telephone, sewerage etc. The fact that the council has decided that it will not maintain services in the residential Red Zone to the same level as prior to the earthquakes, is not something that EQC will be compensating for; 53.2 Neighbouring properties: Any effect from the earthquakes on neighbouring properties will be disregarded; 53.3 Short term temporary stigma: Any short to medium term stigma arising from the earthquakes that may temporarily affect property values will be disregarded Non-insured land: EQC is making an insurance payment to claimants for loss in value of the property resulting from damage to the insured land. To the extent the property includes land that is not insured, the DoV EQC is assessing will not include any DoV resulting from the damage to that uninsured land. 54 Finally, the DoV will not reflect any physical changes to the residential land assessed by EQC as damage in other land damage categories (including increased liquefaction vulnerability). It will be assumed that EQC will assess the loss caused by other categories of damage separately (whether by paying the cost of repair or otherwise). 1 2 Not all buyers review LIMs before completing a purchase based on information from unpublished market research commissioned by the Department of Building and Housing in 2010 as part of the Building Act 2004 review. PIMs were made voluntarily under an amendment to the Building Act 2004 in 2008.

15 12 (F) BACKGROUND CANTERBURY MARKET AND EARTHQUAKES 55 To fully understand the context of the methodology, certain background matters are relevant. The following matters are discussed below: 55.1 The Canterbury earthquake sequence; 55.2 Post-earthquake land classifications; and 55.3 The nature of the Canterbury land market before and after the earthquakes. (F1) The Canterbury earthquake sequence 56 Since 4 September 2010, Canterbury has experienced over 4,000 earthquakes of magnitude 3 or greater. The most significant of these in terms of land damaging events occurred on 4 September 2010, 22 February 2011, 13 June 2011 and 23 December 2011: 56.1 The 4 September 2010 earthquake had a magnitude of 7.1 and occurred near Darfield, 40km west of Christchurch, at a depth of 10km. The September earthquake resulted in damage to both land and buildings, predominantly on the plains The 22 February 2011 earthquake had a magnitude of 6.2 and occurred near Lyttelton, 10km southeast of Christchurch city and at a depth of 5km. This earthquake produced strong shaking for the size of the earthquake, which lasted between 8 and 20 seconds depending on the geology and distance from the epicentre. The February earthquake ground motions were stronger in Christchurch city than the September earthquake because of their proximity. In many areas, the ground motions exceeded the 0.2% Annual Exceedance Probability (AEP) code level and resulted in significant damage to land and buildings both on the plains and in the Port Hills The 13 June 2011 earthquake had a magnitude of 6.0 and was centred 10km southeast of Christchurch city (to the east of the February earthquake). The ground motions for this earthquake again were larger than those in September and exceeded the 0.2% AEP code level in many areas. The June earthquake resulted in further damage to land in the plains and the Port Hills but generally at a lower level than the February earthquake On 23 December 2011, two earthquakes occurred within 90 minutes of each other. These earthquakes were of magnitude 5.8 and 5.9 respectively and were centred approximately 8km off the coast of New Brighton. These earthquakes resulted in further liquefaction and some land movements in the hill suburbs. 57 Several maps prepared by Tonkin & Taylor are included in Appendix 1 to give an indication of the location and magnitude of the earthquakes, and the areas where land was most affected by the earthquakes: 57.1 Location and magnitude of earthquakes between 4 September 2010 and 22 December The pattern of activity reflects the systematic eastward migration of the major events (stars) since the sequence began;

16 Aftershock magnitudes plotted as a time series. This reflects the renewal of activity closely following each of the major events in the sequence; 57.3 Ground shaking intensities in the 4 September 2010, 26 December 2010, 22 February 2011, 13 June 2011 and 23 December 2011 earthquakes. This series of maps show the distribution of peak ground acceleration shaking intensities for successive events. The vertical bars represent the peak vertical ground accelerations and the horizontal bars represent the peak horizontal ground accelerations (i.e. East-West and North-South). 58 More details of the earthquakes and the physical effects of the earthquakes are described in Tonkin & Taylor s geotechnical Stage 1, 2 and 3 reports. 3 (F2) Post earthquake land classifications 59 In discussing land and properties in Canterbury it is necessary to have some appreciation of the land classifications that have been used since the earthquakes, and to understand how they have evolved since September CERA land zoning red, green and orange zones 60 Following the first Canterbury earthquake in September 2010, the Government established the Canterbury Earthquake Recovery Authority (CERA) to lead the recovery planning for the Canterbury region. 61 CERA s role has included undertaking assessments of the areas most affected by the earthquakes and providing recommendations to Government about the suitability of the land for ongoing residential occupation. Based on these recommendations, Government has then made decisions about future usability, represented by red and green zones: 61.1 Red zone the land has been so badly damaged by the earthquakes it is unlikely it can be rebuilt on for a prolonged period: (a) (b) The Government, through CERA, offered to purchase any red zone residential properties at their 2007 Rating Valuation. There were two different purchase options, which resulted in the Crown also acquiring any associated private insurance and EQC claims in some cases. The Crown, through CERA, will therefore be EQC's largest claimant. Land owners who do not accept the Government offer may remain in their homes for now, though the Government has powers to compulsorily acquire their properties if it chooses to do so; It is uncertain what will happen to this land in the medium to longer term. In the short term at least, it will not be used for residential land, and the houses will be removed. Central and local Government have indicated that they will not be constructing any new services, and that maintenance of existing services may decrease as fewer people live in the area; 3 Darfield Earthquake 4 September 2010 Geotechnical Land Damage Assessment & Reinstatement Report: Stage 1 Report (October 2010), Darfield Earthquake 4 September 2010 Geotechnical Land Damage Assessment & Reinstatement Report: Stage 2 Report (December 2011) and Canterbury Earthquakes 2010 and 2011 Land report as at 29 February 2012 (July 2012), known as the Stage 3 Report.

17 14 (c) As such, there are a series of significant practical constraints on whether anyone would attempt to repair or rebuild houses in the red zone. Legally, however, there is no impediment on them doing so, although the engineering requirements for any foundations on many sites are likely to further deter any such developments Green zone the land is suitable for residential occupation, though some properties may require geotechnical investigation and/or particular types of foundations to minimise any future liquefaction damage. 62 While these zones were being confirmed, there was also an orange zone, which represented areas that were damaged but required more investigation to determine whether they would be zoned red or green. 63 The initial red, green and orange zones were announced on 22 June The last of the Orange Zone properties on the flat lands were reclassified red or green on 18 May DBH land categories - foundation requirements 64 The Department of Building and Housing undertook assessments of the green zone to provide guidance on suitable foundations for different areas in order to reduce future damage from liquefaction. DBH announced classification of green zone land in Canterbury in three Technical Categories on 28 October These categories are: 64.1 TC1 (also originally known as green-grey) land is unlikely to suffer land damage from liquefaction in future earthquakes, and standard foundations will generally be acceptable TC2 (also originally known as green-yellow) land may suffer minor to moderate damage from liquefaction in future significant earthquakes. The foundations required range from standard pile foundations to enhanced concrete foundations depending on the house design TC3 (also originally known as green-blue) land may suffer moderate to significant damage from liquefaction in future significant earthquakes. Any repair of, or new, foundations require a site specific geotechnical investigation and specifically engineered foundation design. 65 Research is continuing into appropriate foundation designs for different areas, particularly TC3. The foundations required on TC3 land could vary considerably, depending on the results of geotechnical testing on each property and the style of house to be built. This makes it very difficult to estimate the costs that may be required to design and build appropriate foundations for a house on a TC3 property. 66 It is worth noting that the requirement in TC3 to have a site specific geotechnical assessment is usual practice throughout the rest of New Zealand. However, with all the uncertainty over the effects of the Canterbury earthquakes and the nature of the land, DBH decided to release what are in effect pre-approved foundation designs for TC2 and acknowledged that no specific requirements existed in TC1, to assist with redevelopment in Canterbury.

18 15 (F3) Nature of Canterbury land market before and after the earthquakes Housing market prior to the earthquakes 67 Immediately prior to the 4 September earthquake, the Christchurch real estate market was trading normally, at low but improving volumes. 68 The housing market had shown small upward trends from 2008/2009 levels in both volume and value in the months immediately preceding the September quake. 69 Price levels for houses at the time of the September 2010 earthquake were static, being overall about 4-5% below the August 2007 rating values. The median dwelling sale price at that time was $317,000 for the areas worst affected in the earthquakes (Original Red/Orange zones). This compared to a citywide average of $338,000. Vacant section (land) market pre-earthquake 70 Land sales prior to the September earthquake were scattered throughout the city, with concentrations within the major subdivisions, as well as scattered subdivision of larger existing residential block land surrounding Christchurch. The major subdivisions were mainly located to the North and West of the city, where developers had previously purchased land for future development. Significant subdivisions that were in existence at the time of the earthquake included Delmain at Yaldhurst, Gainsborough and Preston Farm at West Melton, Aidenfield at Halswell, and various small scale residential subdivisions at Rolleston and Lincoln. To the North of the city, a large number of sections were available at Pegasus. Other smaller subdivisions were scattered across the city, with a surplus of supply over demand. 71 In the six months prior to the September earthquake, land sales within Christchurch City were occurring at an average rate of 40 per month, with a median sale price of $215,000 and, on average, at the same level as the 2007 rating values (compared to houses at 95-96%). The median sale price across Canterbury was somewhat less due to the lower section prices outside of Christchurch City, including sections in Selwyn District (Lincoln, Rolleston and West Melton) and Waimakariri District (Rangiora, Kaiopoi and Pegasus). 72 Prior to the quakes, there was a significant amount of land held by developers waiting for the market to improve prior to commencing the subdivision process. The most extensive potential subdivision was in Marshlands, where a joint venture of developers was in the process of seeking a zoning change to enable residential development to occur on former market garden land. The un-subdivided land had potential for approximately 2,500 sections. There was also significant capacity at Pegasus Township. Housing market after the earthquakes 73 Following the earthquakes of both September and February, the housing market initially stalled, and was then characterised by low levels of activity (effectively nonexistent in the most damaged areas) which slowly returned as the market became aware of areas where occurrence of property damage was low. As market activity returned there was an initial volatility (high and low sales relative to Rating Values), as anxious market participants bought and sold. Gradually the volatility has reduced, with sales initially occurring in the non-damaged areas, and encompassing

19 16 the wider spectrum of the market as knowledge of the nature of the damage and repair strategies became clearer. 74 As the market has attempted to return to normal, the proportion of total number of open market sales of houses in the damaged areas has increased compared to immediately after the earthquakes where in the short term a virtual non market situation arose with little if any recorded sales. Sale prices in these areas are typically highly variable, reflecting a divergence between repaired and unrepaired homes, and often differing vendor/purchaser motives. The availability of ongoing insurance is also of significance, with an increasing number of damaged but safe written off houses selling. The median sale price has increased significantly for both damaged and undamaged houses. A feature of the market is that houses that have been repaired post-earthquake are selling well in all areas of the city. 75 Post-earthquake sales following the earthquake sequence of houses in nondamaged areas have shown a significant increase in median price over and above the average for the City. This is tempered by the reduction in the number of panic buys that occurred immediately after the major earthquakes. 76 The median house sale price in Christchurch in February 2014 was reported by REINZ to be $420,400 compared to $338,000 in September 2010, a 24% increase. 77 A feature of the post-earthquake market is the high proportion of properties that are being marketed for sale at auction. The uncertainty of market conditions, and relative shortage of properties on the market, has created an environment that encourages auction sales. Due to insurance pay outs, there are significantly more purchasers in a cash or pre-approved position, which creates a competitive environment for well conducted auctions. Fixed price private treaty sales are less common than before the quakes. As an example, Harcourts auctioned 36 residential properties in July 2013, of which 24 sold under the hammer, and a further five shortly after auction. Vacant section (land) market post-earthquake. 78 In the areas where land damage occurred, section sales ceased to occur in the immediate post-earthquake period. 79 Following the September earthquake and the first earthquake event in areas affected by February and June earthquakes, there is no useful directly comparable evidence of land sales. Land sales outside of the affected areas confirm that the wider market continued in a relatively unchanged manner. 80 In unaffected areas, section sales in the immediate period post-earthquake following the September earthquake continued at reduced volumes, slightly decreased median sale price, and at slightly reduced levels relative to the 2007 Rating Values, showing a decrease of 2%. In other words, the post-earthquake vacant land market in areas that are undamaged was relatively unchanged in the period immediately after the earthquake events. This is in contrast to areas that were damaged, where there is no sales evidence to indicate market value between September 2010 and June Section sales since the February earthquake, and particularly since the CERA red zone offer programme was initiated, have been predominantly in less affected areas of Christchurch, including the Selwyn township of Rolleston, with vacant land in

20 17 Rangiora, Kaiapoi and Pegasus also being in demand. The median section price for Canterbury-Westland (REINZ) was quoted as $175,000 in July In summary, sections in areas unaffected by the earthquakes have tended to sell well, whereas sections in damaged areas are sometimes being sold at what appear to be fire sale values. Market response to potential demand for vacant sections 83 Since the earthquakes there has been a significant increase in the supply of residential sections, particularly to the north and west of the city where the land is largely undamaged and land suitable for subdivision was available. Developers who had land-banked land for future residential development were encouraged (by a perception of increased demand for sections) to bring developments forward. Government intervention to speed up the regulatory processes around land development has meant that several large scale subdivision developments have commenced earlier than they would have if there had not been any earthquakes. The impact is that subdivision development was sped up by a combination of perceived improved market conditions and decreased regulatory compliance timeframes. 84 Infill development is also becoming a significant feature of the market. As houses are demolished, sections in already established areas are becoming available. Such sections are attractive to people who may have lost their home, but wish to stay in the community they were in prior to the quakes. Sale prices on infill sections are often volatile, reflecting a mismatch of motives of the parties (a non-willing buyer / willing seller situation) and possible lack of information about the extent of land damage that has occurred, particularly ILV and IFV damage. Analysis of vacant section (land) prior to and post the earthquakes 85 Looking at median sale price for sections from March 2010 for both Canterbury and New Zealand (6 months prior to the first earthquake) through to late 2012 REINZ data shows the following: Median sale price - residential sections - source REINZ