Pictured: 23 Linkwater Way, Parklands. Sold at auction for $500,000, May 2016.
"As is, where is" houses are flooding the Christchurch market. Will this gold rush hurt the city's housing stock? JOHN McCRONE investigates.
Insurance is still producing winners and losers in post-quake Christchurch. I walk past just as Harcourts agent Pedro Park is shutting up after a viewing on another "as is, where is" sale in Parklands.
The munted three-bedroom property, only 10 years old, has ugly cracks through the wall, unkempt shrubbery swamping the windows, and the concrete slab foundation is on a fatal 160mm lean. It belongs to one of the winners. Park tells me how it has worked out for the lucky owners.
As a house – nice neighbourhood, facing the park – it would be worth about $550,000, he says. But repeated ground liquefaction has cracked the pad and twisted the house at the seams.
After doing geotech investigations, the insurer has discovered that with this being TC3 land, a rebuild was going to cost it north of $700,000. And who knows how much more once it actually started digging into the soft soil?
"It would need special foundations – ribraft or something. And you would spend all that money for a house which would end up still only being worth $550,000 in resale value," says Park.
So for the insurer, it was better to cut the owners a cheque for the $700,000, a quick cash settlement that lets both sides walk away.
Ka-ching, I suggest. Park nods in agreement.
Without wanting to reveal too much, he says the owners in their mid-50s now have enough dosh to buy a new house closer to town and also stick what is left-over in a rental investment property. Plus they are free to sell their original home for whatever it might get in an as is, where is sale.
Of course the property is officially stuffed, fit only for demo, says Park. But you know the equation. Someone will snap it up for about its land value – around $160,000 – and turn it into cheap rental.
After all, the bungalow is still standing. It's a substantial dwelling in a great location. So plug the worst cracks to make it water tight and legally habitable and you could let it for maybe $280 or $300 a week.
Ka-ching, ka-ching. Another chunk of free money for the owners. Perhaps they will be taking that round the world trip or driving an Audi after the auction?
Meanwhile some sharp investor will be getting the kind of fat return that is impossible to find on any regular investment these days.
Of course there is the question of what this will all mean a few years down the road, says Park.
This was a tidy modern subdivision. Across the street, some expensive homes are being repaired. The owners are staying and making the insurers do the fixing, either because the damage is lighter or because it does not seem the right thing to take the money and run.
And the story is being repeated in every Christchurch suburb that was liquefied or the hillsides shifted. Instead of rebuilds, as is, where is deals are seeing munted houses being turned into cut-price, bottom of the market, rentals that may blight a neighbourhood for who knows how long.
Park says most buyers claim to have an exit plan. Knock it down and redevelop one day. Or perhaps remediate the property once the construction boom is over and builders are scratching for work.
Park shares a sceptical shrug with me. Even to clear a section is going to require a further $20,000 investment, he says. However, at the moment you can't argue with the market's behaviour.
Why wouldn't an owner take the cash if that works out far more favourably than persevering with a rebuild? Why wouldn't a buyer take a gamble on a fire sale property that will more than cover itself in the short term with its rental stream and also offer the lure of long-term options?
It is the way things are working out and who is there to care about what it will all mean for the state of Christchurch's housing stock in a few year's time?
Harcourts agent Peter Griffioen, left, speaks with Marcus Webb, a prospective buyer of an as-is, where is house.
Government was warned
In fact the Government was warned about the perils of as is, where is sales right when they first started happening in 2013. It was not just the issue of slum rentals but the prospect of speculators doing cosmetic touch-ups and quietly slipping structurally damaged properties back on the market.
At a public rebuild forum, Earthquake Recovery Minister Gerry Brownlee acknowledged the danger and said the Canterbury Earthquake Recovery Authority (Cera) would talk to the Ministry of Business Innovation and Employment (MBIE) to seek solutions.
However Canterbury Communities' Earthquake Recovery Network (CanCERN) spokesperson Leanne Curtis says talking is all that has happened to date.
"Everyone's certainly been discussing it. Cera's community forum has brought it up. Cera's advisory board has brought it up. So there's no shortage of people saying this is potentially a problem. But where it falls down is, who picks up that conversation?"
And Curtis says the surge in cash settlements – hence in as is, where is sales – is happening right now.
The complicated, too expensive to economically repair or rebuild, properties have been grinding their way through the insurance system for the past few years.
Owners who managed to fend off the early low-ball offers or intimidatory tactics of their insurers are finally getting the offers that make it worth their while to move on. Deals like the $700,000 that reflect the true cost of rebuilding a $550,000 home on bad ground.
In May, IAG announced it was cash-settling its last 2000 customers in a hurry because now is the time to draw a line under its liabilities. A quick exit this year also suits the other insurers.
Even Southern Response (SR), the Government-owned entity responsible for winding down AMI's claims, is being forced to relax its cash settlement policy.
SR was trying to protect the quality of Christchurch's housing stock by either project managing the rebuilds itself – ensuring a house was reinstated to an insurable condition – or at least insisting an economically unrepairable house was demolished following a cash settlement.
But owners have been winning the right to their bonus as is, where is sales by producing an independent "habitability" report. If the foundations are shot but the above ground and the structure is still liveable, then why not get some financial advantage out of a property for a few more years?
Curtis says because as is, where is sales were not headed off at the pass by Cera or MBIE creating some industry guidance, 2015 is likely to develop into something of an investor's gold rush.
"We have insurers doing what they're entitled to do, which is cash settle. And home-owners doing what they're entitled to do, which is to sell as is, where is. But in a world with earthquake leadership, Cera would have stepped up six months ago and done something about all this," Curtis says.
As is, where is pioneers
To find out what is happening at ground level, I seek out two of the pioneers of these sales, Phil Jones, the owner of Ray White in New Brighton, and Peter "Griff" Griffioen of Harcourts Gold in Parklands.
Jones says like everyone, at first the idea of re-selling an insurance write-off had him bemused. "We were asking could it even be done?" No-one knew the rules.
But Jones says pretty quickly there were a few adventurous entrepreneurs who could see the profits to be made. And now as is, where is deals have become half of his business. It has developed into a feeding frenzy.
He put one property on TradeMe for an hour and five people had rung up. "We had the open day and got 13 offers on the property. We thought it would sell in the early $100,000s and ended up with about $160,000."
Jones never thought it would become quite so big. His own first sale was back in 2012 to a demolition contractor who took a fancy to saving a character bed and breakfast house in New Brighton. "He felt he had the skills to take it on and repair it."
But soon after that it became obvious Christchurch had a crying need for cheap rental properties, especially with the arriving construction workers. And here were all these homes, mostly quite liveable despite ruined foundations, that were otherwise going to get bulldozed. That is when the experienced property investors moved in.
"As a rule of thumb, if you could pick up a place for $90,000 to $120,000, you could rent it out for $300 a week and realise a 15 to 20 per cent return on your money. A lot of canny investors were out there door-knocking people who had just been cash-settled and were getting some amazing deals."
To be frank, given the state of many people's minds, there would have been some fairly predatory deals early on, Jones agrees. Home owners were living with the aftershocks and Portaloos, so just wanted out at any cost.
But by 2013, a true market had begun to form. Estate agents like himself had built up the experience to advise on fair prices. As is, where is sales doubled in value as a wider circle of investors began chasing each property.
The profit margin for buyers shrank accordingly, says Jones. But they were still talking about rental yields of 10 to 12 per cent compared to 6 per cent for an ordinary rental property. What also stoked interest was that it became possible to find off-shore finance and insurance for the deals.
At first, New Zealand banks wanted nothing to do with as is, where is sales, so the opportunity seem strictly limited to those able to make cash offers.
But local investors found they could raise loans from mortgage brokers in the UK. The interest rate might be stiff, but then the rental yields were enough to make it pay. Likewise, there were London insurers who would offer basic fire insurance at the right price.
And as as is, where is sales became more established, even New Zealand funders started to lend up to 80 per cent on land value, says Jones. This is fuelling sales in the desirable hill suburbs and Merivale and Fendalton areas especially.
Jones says there the section alone might be valued at $400,000 to $600,000. Thus getting a mortgage against the land is the deal nearly done.
So the professional investors market is well developed. And Jones says they will be looking at this year's wave of settlements with a hungry eye.
Some are small construction companies who know the insurance rebuilds are drying up and are accumulating 20 or 30 properties to create their own stockpile of future remediation projects.
But Jones says other quite different kinds of buyers have emerged. One significant trend is parents helping their children on to the property ladder.
With housing becoming so expensive for first-time buyers, many families have twigged they can buy a bargain price as is, where is property as a long-term "do it upper".
The parents usually have some savings or can borrow against their own homes. Jones says as many a fifth of his as is, where is sales are of this type now.
And Jones says a still more surprising, but just as logical, buyer has entered the market with older people finding a clever way to downsize.
"I recently sold a very nice as is, where is property to a couple in their 80s. A pretty go-ahead pair. They just wanted to get a place as good as where they lived and have some extra money for their retirement."
You can see the appeal, Jones says. "Why have possibly $600,000 tied up in a house you're rattling around in when you can get something similar for half that and have $300,000 left over to spend on other things."
If you are not too concerned about having insurance or problem foundations, then this is the new form of equity release. Why, Jones admits, he is even looking at it for himself.
"I've been saying for 18 months now that this market must be peaking," says real estate agent Peter Griffioen. "And then another surge of properties comes through."
Harcourts' Peter Griffioen, another agent who has been riding the as is, where is wave, says he had the same first reaction as Jones. "You mean you can even do this?" he laughs. But the market now has its own established sales model.
Griffioen says a key has been making the sales process transparent. The old school approach to real estate was to give away as little information about a property as possible. Let the buyer beware.
Recent changes to real estate law because of leaky homes already mean agents can't conceal known problems with a property. However Griffioen says with the as is, where is market, where by definition the house being sold is faulty, it works better simply to put all cards on the table from the outset.
So look up a property on the Harcourts' website and there are clickable links to all its insurance and engineering reports. Quite a departure, Griffioen says. Harcourt's policy is even to insist on sellers providing an independent habitability report.
"Even if they don't ask it, the big question in the back of every buyer's mind is going to be whether the house is actually safe to use as a rental. So it's better just to provide them with those checks right from the beginning."
This is why the as is, where is market is flourishing, he says. People feel informed enough about the risks they are taking. The rules of the game have matured. So Griffioen is expecting a bumper year now that the insurers have decided they are finally keen to cash settle at reasonable prices.
Checking the Christchurch's real estate database with a quick listings search, Griffioen finds 230 as is, where is properties currently on the market. With a cluck of a tongue, he says even for him it is a little hard to believe.
"I've been saying for 18 months now that this market must be peaking. And then another surge of properties comes through."
Filling a natural gap
The combination of willing buyers and happy sellers is proving hard to resist. And while it is still happening, it is also difficult to judge whether it is really a problem for the city.
Ray White's Jones points out that Christchurch has lost many of its low-end rental properties because of the quakes. Plenty were red zoned. And rebuilt investment properties are of course going back on the market at new house rental prices. So the as is, where is sales are only filling a natural gap.
Also, while they may be earthquake damaged properties with sticky doors and tilted floors, most are either modern homes or lovingly maintained villas.
"For $200,000, you might be getting a nice high-quality bungalow with fires and good insulation, rather than something that's been a rental for the past 20 years and never had any money spent on it."
Jones says the neighbours might not appreciate the new tenants in their street, but the tenants are probably getting a better standard of rental housing than they could get pre-quake.
Insurance Council of New Zealand chief executive Tim Grafton agrees there ought to be some kind of official response to the fast-spreading as is, where is market.
Grafton says for example that insurers, MBIE and Cera have been discussing ways to ensure the original property reports stay on the public record – such as attaching them to the council's LIM record so any structural problems can't be concealed in future resales.
However he says this has run into difficulties because of privacy issues, as well as the simple question of who is going to pay for and maintain such a database.
And he says as is, where is sales can't just be outright banned as some suggest. Insurance settlements are private contracts and people are acting within their rights.
Grafton says if rentals are left to deteriorate and become unfit, then the usual building rules will apply. As they will if people start trying to put botched repairs back on the market.
So the authorities are watching and waiting at the moment. "If there is a real problem here, it is going to emerge over time, not in the next 12 months or two years."
In the meantime, as is/where is sales have become another of those "only in Christchurch" postquake stories. A clear win-win for buyers and sellers, at least for the moment.
- The Press