Christchurch is so screwed [UPDATED]
16/04/2012 § 23 Comments
I’ve just spent some time in the South Island. We listened to the news and got the Christchurch paper a few times. The contrast between the news there and the news in the North Island is stark. In Christchurch, the earthquakes and the recovery are front-and-centre all the time. For Wellington, these issues are just one of many stories, merging into the general cacophony of stuff-I-should-care-about.
Well, Christchurch is screwed. Sorry for the language, but it’s true. And the rest of the country should take notice, because this is what will happen to them in a big event. The problem is the government — EQC and Cera — and the insurance companies. It’s the eternal run-around. It’s your worst medical insurance problem while waiting to renew your driver’s licence at lunchtime on a Monday.
The government is doing what bureaucracies do. It is creating processes. It is making sure that everything is correct, that all the boxes are ticked, and, above all, that their asses are covered. So it moves slowly, carefully. Safer to keep people from doing something than allow them do the wrong thing.
Insurance companies are doing what they do. They are minimising their expenses and protecting their bottom lines.
- TC3 land — Cera used to have three land categories, of which Green was the safest. Then, they re-categorised land. Green was subdivided into TC1, TC2, and TC3. Now, although TC3 is still Green, it doesn’t actually mean ‘safe for building’ anymore. It means ‘we have no idea’. Something may happen, but maybe not, and you might want to build with that in mind, but we can’t tell you how. Sensibly, people aren’t buying TC3 properties. So now, the property market for big areas of the city has completely seized up.
- Foundations — Cera says that they are working on figuring out what foundations are necessary for the different land categories. The problem is that Cera isn’t doing the rebuilding, the EQC is. EQC isn’t checking foundations unless there’s a good reason to check (house split in half or off its piles). The result is likely to be a bunch of repaired houses that either can’t be sold, sell at big discounts, or aren’t safe for the land on which they sit.
- Rental properties — Payments to cover people’s rent while they can’t live in their houses have been a problem from the start. The latest story is an insurance company saying that it would pay, and then reneging on that. The Minister in charge has said that there are a number of ways the private market could and should be sorting things out. Robin Clements rightly points out that the market IS finding its equilibrium, but that equilibrium is socially unacceptable.
- Red-zone repairs — The Red land zones are supposed to be beyond repair; the plan was to abandon these areas (e.g., these properties on the Avon River). [UPDATE:]
Now, insurers have decided that it will be cheaper to repair houses on those sections than to pay out for them. Part of the reason they can do this is thatthe Government conveniently relaxed building regulations. What hasn’t been made clear is how you sell such a house, since the Government has decided that the land should be abandoned.In the comments and in his own post, Eric Crampton clarifies the situation. [END UPDATE]
These are familiar economic problems: the market for lemons, decisions under uncertainty, asymmetric information, moral hazard. They boil down to two common threads:
- Increased uncertainty — Changing the rules and waiting for decisions have hugely increased uncertainty. These aren’t the result of the earthquakes, but of the subsequent policies. Uncertainty costs the economy, and Christchurch is paying dearly.
- Shifting costs onto individuals — People are having to paying out-of-pocket for rentals, fight to have legitimate bills paid, and take massive hits on their home equity. These are all costs that insurers and the government are shifting off their books and onto individuals.
Christchurch people paid their insurance policies. They paid for their earthquake coverage. They should be fully compensated. Instead, they’re getting shafted. Unless this changes, the Christchurch economy will be injured for many years. Not because of the earthquakes, but because of the aftermath.