by Geraldine Murphy for ICW
Hundreds of people in Wellington are suffering the consequences of owning an apartment home in a building that has been assessed as earthquake-prone. They are being forced to manage and bear the full costs and risks of delivering a public benefit without any protections or compensation.
As a consequence, these apartment home owners are dealing with life changing financial losses, disruption and health problems, and in many cases facing the loss of their homes.
Few if any will ever recover the full cost of strengthening and the original capital value of their homes.
Thousands of other home owners will find themselves in this situation as the perverse consequences of the legislation become apparent in other parts of the country.
In this submission and based on extensive research, Inner City Wellington (ICW) highlights numerous generic problems with the EPB policy, legislation and implementation system that have implications for owners of all types of EPBs. All of these problems should be addressed for the sake of all stakeholders.
However, we are specifically concerned with the very particular impacts of the EPB regime on the owners of private homes in multiple-ownership residential buildings (MORBs), which we define as buildings that:
a. Have two or more storeys and contain three or more units
b. Are wholly or predominantly residential
c. Contain individual apartments homes
d. Are in multiple-ownership – unit titles or cross lease/company share on a single title
MORBs are distinct from all other buildings in that they are not open to or used by the general public, and owners of homes in MORBs are a specific stakeholder group. In Wellington, we estimate there are over 380 apartments currently in EPBs.
1. The policy attempts to externalise responsibility for public safety, a core purpose of government, to private individuals
Public safety is a core purpose of government, yet the EPB funding model is unique and iniquitous in that it forces private individuals to take responsibility for delivering (very small) long range public benefits, at their own cost and risk, no matter how great those costs and risk might be.
As the cost benefit ratio was negative in the 2012 cost benefit analysis, the programme would not have met Treasury requirements if it was going to be funded from public funds.
The model forces a massive and involuntary shift of capital from home owners to the building industry, government GST revenues, lawyers, and developers.
2. Implementation of the policy amounts to extortion
Home owners are made liable for the limitless costs and risks of compliance with potentially devastating effects on home owners’ financial position, life choices and health.
To force them to make decisions that are not in their interests, home owners are threatened with non-compliance penalties of $200,000 fines and compulsory demolition of their homes, at their cost
No discernible benefits accrue to home owners.
3. The system does not recognise home owners
Home owners’ interests are not the same as those of public or commercial owners. Owner occupiers and small-scale rental owners have to pay more than commercial building owners because they cannot claim back GST or set expenses against income for tax purposes.
Home owners are vulnerable. Most do not have the competence or confidence to be strong clients in a hostile environment and to manage complex, high risk, commercial scale building projects.
Approaches to Government and WCC to consider the impact on apartment home owners have largely been met mainly with disrespect, closed ears and closed minds.
4. The policy is based on unreliable data and weak analysis
The 2012 policy analysis and advice was poor quality. It depended on unreliable data and unfounded assumptions in some areas. It did not include any analysis of the financial or social impacts on the funding stakeholders, building owners. There was no stakeholder analysis or risk assessment.
5. Real costs are 10x higher that the 2012 estimates
It appears that the actual costs of strengthening are ten times more that the estimates of costs in the 2012 cost benefit analysis and costs are rising at around 5% a year.
In recognition that some affected owners will not be able to afford or borrow their share of the costs, the Government has put $10m in Budget 2019 to support suspensory loans, subject to eligibility criteria yet to be announced. This scheme will only be useful to a small number of owners in buildings where strengthening is progressing.
6. Strengthening rarely meets the critical criteria of financially viable, practically feasible, and low risk
Retro-strengthening of residential buildings, is prohibitively expensive, technically complicated, and has impacts on the lives and owners and their families far beyond any value it delivers. For most owners, strengthening is not financially viable, not practically feasible, and is far too risky. Selling is likely to be the best worst solution but even this is likely to result in significant losses with lifelong consequences. Inevitably, owner will suffer stress and maybe worse mental health problems.
7. Including MORBs in the EPB regime has almost no impact on public safety
The risk posed by buildings that are not used by the public is negligible, yet these buildings are treated as posing the same risk to public safety as public and commercial buildings.
An estimated 12% of all EPBs are private residential buildings, not public spaces. Exempting them from the mandatory requirement to strengthen or demolish, except to secure non-structural elements, would have an infinitesimally small impact on public safety outcomes and remove an unnecessary imposition on the lives of private individuals.
8. Remediating existing building is much more complicated than has been acknowledged
Compliance timeframes are unrealistic. The decision-making process in MORBs is complex with owners having different personal and financial circumstances. Even with concerted effort, it can take years to progress to a decision.
Home owners are being expected to make decisions about complex, technical, and expensive construction projects without any effective supports. This places unreasonable stress on a few individuals who step up to take the lead and is impacting on their wellbeing.
Building companies willing to take on multiple-owner clients and work on earthquake strengthening projects are few and their order books may be full for some time.
9. Emerging issues increase the risks
Rising costs, collapsing building companies, newly identified structural problems, and a building industry with capacity problems all adds up to a very risky environment for home owners to be considering strengthening projects.
Almost daily new revelations appear about yet another building that has been found to be earthquake-prone, or to have dangerous faults due to the use of substandard materials, methodologies and workmanship, or both. This increases the risks for owners in residential EPBs as they try to navigate and understand the impacts of these emerging issues across the sector.
The insurance sector is ignoring the seismic rating of buildings that have been strengthened and are actively advocating for a new building standard that includes ‘recovery’. This raises further questions about the policy basis for the EPB legislation and the implications of any new standard for existing buildings.
10. Overseas experiences were misrepresented but offer solutions
No other country has a mandatory retro-strengthening and demolition regime for residential buildings like the one New Zealand has and there are good reasons for that. However, there are examples of alternative approaches focused less on enforcement of the almost impossible and more on incentivising voluntary strengthening and redevelopment.
11. The implementation system is flawed and needs to be tightened if owners are to have confidence in it
The use of % NBS as an indicator of real risk, the integrity of the assessment methodology, the use of the term ‘earthquake-prone’, and the definition of ‘moderate earthquake’ have been issues of contention since well before 2016. They are still problematic. Submissions on these topics received during the policy consultation and the committee stage of the bill should be revisited and further work done on these elements of the system.
Home owners’ lives turn on an engineer’s decision whether a building is less than or more than 34% NBS. There is a widespread lack of confidence in DSA, NBS ratings, engineers and other professionals in the building sector, and building companies. There appear to be no quality assurance processes or protections for MORB clients.
The assessment methodology may allow wide safety margins for engineers to protect themselves from later prosecution. If this is the case, the effect will be to produce ‘false positive’ results, so some buildings will be assessed as earthquake-prone when they are not.
The system does not anticipate any financial impact on home owners and offers no guidance eg likely capital and utility value losses and lifelong impact of losses, issues relating to existing mortgages and loan commitments, access to finance for compliance work, multiple-ownership project funding mechanisms eg escrow scheme, potential for bankruptcy, etc.
The system does not anticipate any social impacts on home owners eg need for alternative accommodation, potential need for social housing, impact on owners with disabilities or dependents who have disabilities, impact on owners with fixed incomes, impact on eligibility for school registration, impact on owners who rely on local health facilities, need for counselling and other support for the effects of stress.
Almost none of the Government’s Expectations for Good Regulatory Practice have been or are being met. Regulatory stewardship is not taken seriously.
MBIE’s external building sector advisors on EPB policy and system design are industry insiders and have conflicts of interest. MBIE’s external advisors do not include any representatives of home owners.
12. The current policy is creating a no-win situation for owners and territorial authorities
Home owners are stuck, unable to comply and frightened of the penalties. In most cases, compliance is not financially viable, not practically feasible, and/or too risky to attempt. Many are thinking of selling but are afraid of what buyers’ market might mean for them.
Compliance or selling could incur lifetime losses as much as $1m per owner, plus the associated social impacts of that.
If the legislation is not amended, this deadlock situation could last a very long time, corroding home owners’ lives with every day the EPB notice hangs over them.
When compliance deadlines pass, WCC will be entitled to enforce the regulations imposing fines, closing buildings and fencing sites, and ultimately evicting occupants and demolish buildings, charging the owners for doing so. No doubt attempts to the enforce the regulations would lead to court action on both side and protests by owners. This kind of situation would be very costly and time consuming for WCC.
This pattern could become commonplace, in Wellington and across the country if the Government does not accept the effect of the EPB legislation on home owners is unreasonable, unfair, harmful and morally indefensible.
It is in everyone’s interest to find a solution before compliance deadlines come around.
Based on our research, ICW believes:
• That the impacts of the legislation on apartment home owners are unreasonable, unfair, harmful and morally indefensible.
• That to address the situation, the Government must take the following steps:
1. Commission an independent, comprehensive review of the impact on home owners of the EPB policy, legislation and implementation system, which:
a. Addresses our claim that that the impacts on apartment home owners of Subpart 6A of the Building Act 2004 are unreasonable, unfair, harmful and morally indefensible
b. Addresses our claim that there are issues with the integrity of the implementation system, and includes an independent scientific assessment of the claims made for its key components
c. Draws on the knowledge and experiences of owners of homes in multiple- ownership residential buildings who have been or are currently in the EPB system
d. Makes recommendations for amendments to Subpart 6A of the Building Act in respect of MORBs
e. Makes recommendations for how home owners who have been or are currently in the EPB system can be compensated for their losses and where appropriate, assisted to exit the system
2. Put a moratorium on any further identification of potentially earthquake-prone MORBs, and requirements to provide Detailed Seismic Assessments, to prevent harm to more home owners, pending the outcomes of the review
3. Contact all home owners who have been or are currently in the EPB system individually to:
a. Inform them about the review including its terms of reference, so that they can decide whether to pause whatever they are currently doing to respond to the legislation
b. Invite them to make submissions to the review
• That amendments to the Building Act should be considered, to remove the requirement for apartment home owners to comply with the requirement to strengthen or demolish their MORBs, but enable an encouragement rather than an enforcement approach to the earthquake resilience of MORBs that would be reasonable, fair and more effective than the current regime.
• That apartment home owners who have been or currently are victims of the EPB regime, should be compensated for losses and assisted to exit the regime by their chosen route.
This is the first part of a submission from Inner City Wellington presented yesterday to Parliament’s Governance and Administration Select Committee by Geraldine Murphy, ICM’s Spokesperson on Seismic Matters, in support of ICM’s two petitions calling for a review of the earthquake prone building legislation and comprehensive support for residential owners in earthquake-prone buildings.
ICM’s oral submission to the Parliamentary Select Committee