VALUING THE RISK OF IMPERFECT INFORMATION; CHRISTCHURCH EARTHQUAKE Callum Logan, RMIT University, Melbourne, Australia

RMIT University©2013 School of Property, Construction and Project Management 2 Background On the 4 September 2010, a 7.1 magnitude earthquake occurred near Darfield. There were no fatalities. Damage to property and infrastructure was moderate. On the 22 February 2011, an aftershock of 6.3 magnitude occurred near Lyttelton closer to the CBD. This resulted in 182 fatalities, collapsed buildings, major property and infrastructure damage. Severe ground liquefaction and lateral spreading occurred. Insurance companies demanded better land liquefaction mapping in order to continue earthquake insurance cover in the future. New land zones were created that specified slab/foundation and engineering requirements for building new homes. One zone was determined to be uneconomic to repair, and the Government offered to buy out homeowners (>5000 houses). The fault line was a blind fault line, but has a low return period (5,000-10,000 years) The city’s prior history of damaging earthquakes was limited to a 7 to 7.3 magnitude event in North Canterbury that toppled the Cathedral’s spire in 1888.

GIS used to capture sales within land zones and create data set. RMIT University©2013 School of Property, Construction and Project Management 3

RMIT University©2013 School of Property, Construction and Project Management 4 EQ land damage zones Before After

RMIT University©2013 School of Property, Construction and Project Management 5 Previous literature findings Earthquake events and earthquake zoning designations have a negative impact on house prices (Murdoch, Singh & Thayer,1993; Anderson & Weinrobe, 1986) Rational consumer behaviour to the pricing of housing occurs when consumers are presented with adequate earthquake risk information (Brookshire et al., 1985). Consumer behaviour studies of risk perception show that people have difficulty ranking the risks of rare and extreme events, when they have not previously experienced them. Once experienced, however, they overweight the risk (Slovic, 1987). There may be a recovery of prices once the perceived level of risk reduces (Sanders, 1996).

Research questions 1.How much weight, if any, did consumers place on the existing (pre earthquake) land zone information in their pricing decisions for housing? 2.How much weight are consumers placing on the new land zones in their pricing decisions for housing now, given the recent experience of a rare and significant event? 3.Is there a structural break before and after the event? 4.Can it be shown that consumers are trading property attributes such as land area, or floor area, to live in safer land zones? 5.If no price gradient reflecting land risk is shown to exist before, or after the event, then a qualitative study will determine the reasons why consumers disregarded it? 6.What can be learned from this? What changes may be needed to mitigate future pricing risk? RMIT University©2013 School of Property, Construction and Project Management 6

RMIT University©2013 School of Property, Construction and Project Management 7 What’s actually happened

What happened in different zones? RMIT University©2013 School of Property, Construction and Project Management 8

RMIT University©2013 School of Property, Construction and Project Management 9 Unique aspects Exogenous shock to market A large quantity of homes were temporarily, or permanently, removed from the market due to severe damage (uninhabitable) or by red zoning. Insurance premiums in New Zealand cover earthquake repair and reinstatement. There is a national government body called the Earthquake Commission (EQC). Part of a households insurance premium contributes to the EQC national fund. Significant and multiple land zoning changes have occurred since the earthquake event(s). Transfer of land risk information is much more efficient now after the earthquake. Large data set 57,000 + sales.

Methodology A DID equation will be used to determine the impact of land zone changes before and after the earthquake. Structural break assessed. Split hedonic estimation assuming a structural break found. This is to examine differences in coefficients for before and after event models e.g., are consumers trading property attributes for safety. Split data set of 57,000 + sales into house and land sales, land only, units, repeat sales to support findings. Qualitative surveys and interviews with key groups to identify and rank the reasons why pre or post earthquake risk zones were ignored - assuming they are found to be ignored. RMIT University©2013 School of Property, Construction and Project Management 10

RMIT University©2013 School of Property, Construction and Project Management 11 Conclusion The case study is unique. The research will utilise both quantitative and qualitative methods There are several interesting aspects of this research, mainly around pricing of risk, trade offs for safety, and consumer behaviour. Next stage – finalise data set, run the models, report findings, qualitative research, report findings, write thesis.