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Urgent need for independent review of apartment strengthening affordability

Media release from Inner City Wellington (ICW)
The Minister of Building and Construction Jenny Salesa has repeatedly said that the mandatory requirement for some apartment owners to spend hundreds of thousands of dollars on strengthening ‘earthquake prone’ buildings will add to, increase or improve the value of owners’ apartments. But no evidence or data is provided to support those statements.

Following two surveys undertaken in 2019 and 2020, Inner City Wellington has data that shows owners’ apartments are reducing in value once deemed to be ‘earthquake prone’.

The significant compliance costs to strengthen buildings will not ‘add to, increase or improve’ value; owners are paying to recover lost value.

Key points based on our surveys and research to support our position:

1. Sales under forced sale conditions (due to pending strengthening compliance costs) reduce the price by any indicated strengthening costs and then by a further 30% to reflect perceived risks, such as decision making difficulties in a body corporate environment, compounded by different financial situations of owners, uncertainty about the final strengthening costs and banks not providing funding.

2. Owners’ experiences of trying to sell their earthquake prone buildings include not being able to attract any offers,or in some cases, real estate agents are unwilling to list the properties for sale. This demonstrates there is no market. A market needs a willing seller and willing buyer. There are no buyers.

3. If there is no market, the value of the property drops. Owners of earthquake prone apartments, who objected to QV’s 2018 valuations for the Wellington City Council, had their properties reduced to or near land value. This is a similar xxx

4. Owners have lost value in the property they bought and are having to pay again to regain that value. For one owner, this is$470,000 in strengthening costs – or $670,000 in the full costs associated with a strengthening project.

5. Once strengthening is completed,the resulting valuation is still based on the current market value of the apartment assuming a willing seller and willing buyer.

6. Architects have told owners to ‘add value’ by including such items as double-glazing or improving the balconies. These are true ‘added value’ components. These costs are in addition to the strengthening costs.

At the Wellington Central Candidates Meeting on 18 August, Wellington Central MP and Labour candidate Grant Robertson said MBIE does not agree with ICW’s position and that makes it difficult for politicians dealing with life or death style legislation.

In response to the first part of Grant Robertson’s statement on ICW’s position: is that about the cost data or our analysis of the Cost Benefit Analysis (CBA) commissioned by MBIE in 2012? We don’t know, as Minister Salesa has not met with ICW despite several requests.

So, we have made some assumptions: it’s about the flawed policy development process, the level of costs and benefits, and the need for an urgent independent review. The absence of, or ignoring of data has been a theme in the development of earthquake prone legislation since the Building Bill 2003. The Department of Building and Housing (DBH) decreased the threshold to 34% New Building Standard (NBS) and expanded the scope of building construction types beyond the unreinforced masonry and concrete that had been in the 1991 Building Act. The Cabinet paper with this recommendation had no data on the number of buildings caught by the expansion, the likely costs or the categories of owners who would be affected. DBH did not advise Parliament of the expansion of scope in the explanatory note to the Bill and the clause in the Bill did not identify the removal of the more restrictive unreinforced masonry and concrete construction types. Consequently, there was no public debate on this.

Affected apartment owners did not know this was happening.

The real costs for residential owners of this policy are critical to any effective evaluation of the policy. We know that MBIE relies on engineers or Wellington City Council (WCC) for data on costs and that these costs only cover construction costs, not the full costs of compliance owners must pay. The report on financial assistance options commissioned by MBIE in late 2018 used WCC data and based the analysis on an average remediation cost of $73,000. ICW had met with the consultants at the start of the work and provided costs for six building sat a variety of stages in the earthquake prone journey. ICW had seen WCC cost data and did not believe it reflected the real story.

The ICW data gave an average strengthening cost per owner of $98,000 – $1.1m, with an average of $355,000. Removing the highest figure, the average strengthening cost per owner was $255,000. A long way from $73,000.

ICW provided evidence from the May 2019 survey to Grant Robertson, our electorate MP, to show the actual costs being faced at that time; the average per owner strengthening cost based on 13 buildings was $241,571 excl GST (total of $277,806). Owners representing earthquake prone apartment buildings also provided evidence of the actual costs to Grant Robertson. As a result, the January 2020 Cabinet paper had $200,000 as the cap and this was subsequently changed through the Cabinet process to $250,000 – again, based on actual data on costs.

The 2020 ICW survey data confirmed the quantum of costs being faced by owners. The average strengthening cost was $302,000. In the 2020 survey, none of the 76 owners who responded to the question had costs under $100,000.

The Minister’s comment that ‘the Martin Jenkins report backing the loan scheme estimated most units could be fixed for less than $200,000’ is not supported by the 2020 survey results: 18 out of 76 respondents to the question face costs of $100,000 – $199,000. The bulk of owners (32) face $200,000 – $299,000, while another 26 owners face costs between $300,000 – $899,000. So the majority of respondents are facing paying much more than what was advised to Cabinet.

The conclusion of the cost-benefit analysis (CBA) commissioned by MBIE in 2012 as part of the policy work leading to the Buildings (Earthquake prone Buildings) Amendment Act 2016 was ‘on a probability basis, costs are well in excess of benefits. Even under extreme sensitivities, this relationship does not change’.

The results of the CBA did not feature in the cabinet papers ICW has seen. It was not mentioned in the debates as the changes went through the parliamentary process. Decisions were driven by public safety concerns and a need to respond to the Canterbury earthquakes.

The CBA did not stack up. But this did not concern the Government as the full costs, whatever the total, would be borne by private owners. We believe we can show that many of the assumptions that underpin this policy are not borne out by the evidence.

ICW analysis of the CBA for ‘residential areas’ (the term used in the CBA) is that just under 4 lives would be saved over 75 years across the country based on buildings being strengthened to 34%NBS, with 0.5 buildings being saved. ICW analysis is if all 50 multi-owner residential buildings in Wellington complied, 0.4 lives over 75 years would be saved.

To the second part of Grant Robertson’s statement on the difficulty of life and death style legislation. This is Parliament’s job. Undoubtedly it is made more difficult when there was a lack of data to underpin the policy decisions that led to the Building Act 2004 and the 2016 changes. There was no understanding of the real costs and the owners who would be affected. The 2016 changes were driven by public safety, which is primarily an issue for commercial and public buildings not private homes that happen to be in apartment buildings.

More data and knowledge of the real costs and impacts is now available. Cabinet and Parliament have a responsibility to demand to see the data and evidence that underpins policy decisions that place costly compliance burdens on home owners and will result in some owners being forced to sell their homes at discounted prices.

If Parliament wants all the buildings strengthened, it must provide compensation. The financial losses incurred by owners strengthening or facing selling the whole building in a forced sale situation is taking away private home owners’ financial assets.

Governments do compensate private individuals – leaky homes, gun buyback, the exercise of Government powers in biosecurity responses. Why is earthquake prone legislation different?

ICW has called for an independent review of the earthquake prone building legislation with respect to multi-owner residential buildings(MORB). The three candidates at the electorate meeting on 18 August all agreed to lobby their caucus and any Coalition partners to progress it.

National candidate Nicola Willis has already got the support of the Building and Construction spokesperson to progress such a review. In her response to an owner’s letter she said

‘I have been persuaded that the application of earthquake strengthening rules in the Wellington context has created such onerous potential effects – with costs and implications far in excess of that envisaged when the rules were created -that a review of those requirements is now warranted. I have discussed this view with National’s Building and Construction Spokesman Tim van de Molen and he agrees a future National-led Government would have to review these requirements with a view to better understanding their costs and effects and mitigating those where it makes sense to do so.’

ICW calls on the next Government to:

1. Accept there is problem.

2. Commission a review
• Commission an independent review of the Earthquake Prone Building (EPB) policy, legislation and implementation system (at least as it affects owners of multi-owner residential buildings).

3. Impose a moratorium
•Pending the outcome of the review, put a moratorium on identifying new potential MORB EPBs; the requirement for MORB owners to obtain Detailed Seismic Assessments (DSAs); and the requirement for MORB EPB owners to progress compliance plans.

4. Provide a compensation scheme
• Provide a scheme to compensate owners who have incurred, are now incurring, or are legally committed to incurring financial losses and impacts due to this legislation.
• A government suspensory loan scheme, heritage building funding, Council rate rebates, and grants for some investigation expenses will not solve anything because the fundamental problem is not affordability. The fundamental problems are that the assumptions are flawed

.5. Provide practical owner-centric transition measures
• Provide apartment owners currently in the EPB regime with options for exiting the regime. Options might include continue with strengthening, opt out of strengthening, sell to the Government or the Council, or sell on the open market.
• Provide these apartment owners with independent advice and assistance to assess the pros and cons of the options available to them, and how to implement their chosen option.