Leak crisis will hit every pocket

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The values of "suspect" but soundly-built watertight houses will be written down in upcoming council rating valuations because of the stigma of the leaky homes debacle - pushing up bills for other ratepayers.

Valuer-general Neil Sullivan has given a clear direction that, with the background of leaky homes, new rating values must take into account the design of a building and its materials.

Widespread buyer resistance against the types of homes implicated in the fiasco will result in a slashed valuation of properties where the style is "suspicious", even though there may be no actual evidence of leaks.

Mr Sullivan, whose office must certify council revaluations before they become effective, says the directive is "to make sure that values are in alignment with what sales data is saying".

If there is any good news for home-owners affected by the stigma, it is that they will pay a lesser share of their local body rates bill than they may otherwise have expected. But someone has to pick up the difference, and that burden will fall on other ratepayers.

The valuer-general's finger is pointing directly at homes and apartments built in the 1990s and the early part of the last decade, most using monolithic cladding (either fibre-cement, stucco or coated polystyrene), often to produce a "Mediterranean-style" property.

The absence of a cavity between the cladding and framing timber (allowed under 1992 changes to a national building code), lack of eaves, flat or shallow roof pitch and inadequate flashings combined with shoddy workmanship to create a nightmare.

A 1995 code permitting untreated timber framing made things even worse. When water seeped inside the cladding and couldn't escape, it rotted the untreated framing and slowly undermined the integrity of the buildings.

As the gravity of the problem became more obvious, building codes were amended, but it was 2004 before cladding cavities were required - too little, too late for tens of thousands of property-owners.

Since 2002 and 2003, when the issue became more widely acknowledged and understood, there has been a growing impact on values, even on monolithic-clad homes built more recently and thought to be as watertight as any well-built properties. It's no surprise that builders have moved away from the material.

Today, real estate agents say many prospective buyers won't go any further than the driveway when they spot monolithic or similar cladding, even though the material itself is sound if properly installed with cavity and superior flashings. But buyers have not been prepared to take any risk, reducing competition for many homes and forcing down prices in an already difficult market.

"We can give them expert reports showing there are no watertight issues, but they are just not interested," says one Auckland real estate agent. "They see it as too risky and just walk away. Vendors have to face reality and drop their prices to get a sale.

"The biggest problems are with those homes built in the 1990s or early 2000s, and prices have had to be discounted 20 to 30 per cent or more, even if there are no signs of leaks. But monolithic houses built since the regulations were tightened are also struggling. They may be perfectly watertight, but they can't shake the stigma and the prices reflect that."

The full extent of the damage remains hidden and will only be revealed as the years pass and houses and apartments rot away. But the market reaction has forced the valuer-general to act now.

His direction, issued in a handbook for rating revaluations, backgrounds the leaky building history and notes: "The valuer needs to be aware that buildings of a certain design type constructed of particular materials have been identified by the market as high-risk and rating values need to take account of this."

The message will have its first major impact in the rating valuations for the new Auckland Council, which will be set on July 1 and revealed in letters to more than 500,000 residential property owners in late October.

It will result in falling capital values for already-reported leaky houses and thousands of other "suspect" properties in the new Auckland Council area and, therefore, relatively lower rate bills for those property owners. CVs for monolithic homes may drop by between 5 and 20 per cent on average, with greater drops for homes or apartments that are revealed as leaking.

The flip side of the coin is that many other ratepayers will have to pay more because, even if their actual values do not increase, the relativity gap will widen. The new council will use capital values to set its rates, and the higher the value of the property, the more rates a home-owner will pay.

National building consents suggest more than 100,000 homes and apartments were built using monolithic cladding in the 16 years to 2008, and at least half of them are probably in Auckland.

A 2009 PricewaterhouseCoopers report assessed the possible number of homes needing repair at between 22,000 and 89,000. The wide range reflects the high level of uncertainty, but the report produced a "consensus forecast" of 42,000 homes that are leaking or will do so in the future.

Because wider Auckland was in full "growth mode" during the 1990s and early part of the last decade, with monolithic-clad homes and apartment blocks appearing everywhere, it's reasonable to assume that more than half of those 42,000 "leakers" are in the area covered by the new council. But the revaluation net will be cast much wider than that.

When those valuation letters arrive in letterboxes in October, as many as 30,000 or 40,000 Auckland property owners may discover a harsher picture of the value of their prime asset.

A team of valuers is working on the city revaluations, with in-house staff handling the old Auckland City Council limits and Quotable Value managing the rest.

They are using computer file data detailing cladding types among a wide variety of valuation tools, including records of comparable local sales, existing CVs and roadside inspections.

Council valuations manager Peter McKay expects the process will identify most of the properties outlined by the valuer-general's directive.

The impact on CVs will vary, with properties built before 2004 or with recorded watertight problems likely to show greater decline, he says. But there is also consumer resistance to Mediterranean-style homes built after the regulations changed, and those rating values will also be affected.

"Our job is to reflect the market, not to make the market," he says. "It is a challenging area but we have to take into account market trends. If certain types of properties are selling at discounts to other types, that has to be reflected in capital values."

The mass appraisal system used for setting CVs within rating valuations doesn't have the precision of an individual registered valuation and no internal inspections are made. Rather, to assess how much a property owner should pay in rates, it gives a value snapshot that tries to reflect market value at that time. It may be a little high or a little low.

Most people accept their new CVs, but they are open to appeal. Some people don't want to pay any more than they have to in rates and will argue their CV should be lower; others see future-sale value in a higher CV and will fight for a change.

But in the latest round of Auckland revaluations, owners of Mediterranean homes that have been soundly built will need a strong case to force up their capital valuation.

Even expert evidence that their homes are watertight is unlikely to override the buyer resistance pointing to true market value.

What it's all about
* All houses built with monolithic cladding have dropped in value because of the leaky building crisis.
* Their council rating values will fall between 5 and 20 per cent, with even bigger drops for homes confirmed as leaking.
* The monolithic home owners will pay less in rates but other ratepayers will have to pay more to make up the difference.
* Auckland ratepayers will be among the first affected when new valuations are sent out in October.