Waterfront property prices are holding up in spite of all the evidence that they will soon be underwater, creating a new housing shortage just as the country is building its way out of the existing one.
Coastal home and bach owners will soon be having "awkward discussions" with their banks, which will no longer lend against properties that can't be insured for rising sea levels.
Kiwibank chief economist Jarrod Kerr has issued the warning, in a Newsroom Pro Talks live interview.
"Yes, I think it's inevitable," he says. "I think if if you take Niwa's forecast for sea level rise in New Zealand – just sea level rise, notwithstanding droughts and all the other issues, but just sea level rise – there are a number of households in this country that are going to be underwater."
Kerr and his wife bought a piece of land at Mangawhai 10 years ago, to build a home. "I'm a bit of a nerd," he says. "I wanted it high and far away from the beaches. Because I'd always thought that climate change was coming and going to have a big impact. So we're on top of a ridge, well back from the beach.
"But I tell you what, I had no grey hair, before I started building. And I've got loads of it now. So it is a stressful thing to do.
"Unfortunately, there are a significant number of Kiwi homes pretty much at sea level. And there's going to be a difficult discussion."
The Government has announced it will draft a Climate Adaptation Bill, to address the complex legal and technical issues associated with managed retreat from the coastlines and other vulnerable areas, and funding and financing that adaptation. It has also just passed a law mandating climate risk disclosure.
Earlier this year, Kiwibank published its Sustainability Report estimating 1.2 percent of its home lending portfolio was exposed to coastal flood risk, with climate change expected to cause this portion to rise to 1.8 percent by 2050.
This was based on National Institute of Water and Atmospheric Research, showing 72,000 New Zealand residents were already exposed to extreme coastal flooding risk, in about 50,000 buildings worth $12.5 billion. This could easily double by the end of the century, Niwa calculated.
"We've got a mortgage on that property, and it's uninsurable. Well, I'm sorry, but the mortgage might have to go as well. So that would be a very awkward discussion that I think we're all going to have to have over the next 10 to 15 years." – Jarrod Kerr, Kiwibank
Westpac NZ's Climate Risk Report agreed that homeowners would face insurance premium increases, higher excesses, exclusions of some hazards, or insurance companies refusing to sell them any insurance. “Higher premiums may impact customers’ ability to service debt, while inability to adequately insure properties could lower their value. This could create a credit risk to Westpac NZ."
"How can we protect those homes? Maybe we can't protect those homes," Kerr says. "So what are we going to tell these people? Well, the first thing that those people are going to find out that their insurance premiums have gone up. Or that there's a massive exclusion like, well, if your house is under-water, you're not covered. If it catches fire, you're covered, but under-water, you're not covered.
"Where this becomes a bank problem is where the insurance company says, you know what, we're not even going to increase your premiums anymore, we're not even going to give you exclusions, we're just not going to insure that property. We can't insure that property in that area. It's too dangerous."
That's when Kerr says his colleagues in the banks will have to make tough decisions – not just no new loans, but on existing mortgages.
"At that point, we've got a mortgage on that property, and it's uninsurable. Well, I'm sorry, but the mortgage might have to go as well. So that would be a very awkward discussion that I think we're all going to have to have over the next 10 to 15 years."
Kiwibank has analysed comparable overseas areas that are low-lying, and some ending up under-water like parts of Florida. Incredibly, here and overseas, buyers are still paying for those seafront homes. "Believe it or not, the prices of those dwellings are still holding up really well. You would expect the prices to be falling with this knowledge that these areas are potentially going to be under-water.
"People just don't believe it yet. And I think it might take five to 10 years before people actually start taking it really seriously."
Kerr says the inundation of coastal properties will add to a new housing shortage.
"So we have a mammoth task ahead of producing somewhere between 70 and 100,000 homes to try and balance this market. There will be houses which will effectively be taken out of circulation over time, and that's a very difficult discussion to have."
"We have loads of land, we just don't have the sewerage and electricity and roads to utilise that land. So that under-investment, which has been going on for decades, has led to a chronic housing shortage. And we need more ideas as to how we can build 100,000 homes." – Jarrod Kerr
Kerr and his wife have now finished building their house above Mangawhai, between Whangārei and Auckland.
"It proved to me how broken the New Zealand market is, and just how difficult it is to build in this country. So what I did is I went outside the country, I went to Australia, I went to a kitset builder, I said, I like that design of a house, modified it, they made it into a kitset, they put it into two 40 foot containers, and they shipped it down here.
"Now in doing that, I saved about a third of the building costs by importing all the steel frames, the roof, the Gib board, all the all the building materials, except for insulation came from Australia, and it came at a much, much cheaper price than trying to buy it here.
"And you put that down to a number of things, lack of competition in New Zealand, the economies of scale of Australia, that they produce a lot of aluminium.
"But looking outside the box and going somewhere else, and saying right, let's try and do this in New Zealand. The bank thought I was mad for attempting this. But it all worked out well. And the cost of the build was at least a third less than had I done it all in New Zealand."
Last week, at the Government's direction, the Commerce Commission began an inquiry into competition in the building supplies market in New Zealand.
"The fact that I could ship materials over so taking into account the shipping costs, which aren't cheap, and build a house far cheaper than had I done it locally suggests there's a problem," Kerr says. "Most of New Zealand's housing problem is at the supply side.
"There's a bit of a myth out there that New Zealand doesn't have a lot of land. We have loads of land, we just don't have the sewerage and electricity and roads to utilise that land. So that under-investment, which has been going on for decades, has led to a chronic housing shortage.
"And we need more ideas as to how we can build 100,000 homes."
