In many countries, it has been overwhelmingly demonstrated that natural hazards disclosure has an impact on the real estate market. These impacts are of course influenced by a complex interaction of related social, economic, political and physical factors.  Even so, it seems obvious that putting new buildings near geological hazards potentially puts more lives and property at risk.

The Fault Avoidance Zone (FAZ) in New Zealand

Although notoriously difficult to forecast, many prominent scientists predict that the Alpine Fault is the most likely fault in New Zealand to cause surface rupture within the design lifetime of existing built structures. The probability of rupture in the next 30 years has been estimated to be around 20%. In geological timeframes, a “big one” is well overdue. However, the impact of such potential disasters on the real estate market is equally and perhaps surprisingly hard to predict. This is despite the public, financial institutions and insurers becoming more conscious of the risks associated catastrophic earthquakes following major events especially since 2010.

Irrespective of the degree of risk, few people would argue that rupture of the well-known Alpine/Wairau Fault poses a significant hazard to the people and property in the concerned areas. It was in recognition of this potential hazard that the West Coast Regional Council in collaboration with GNS Science developed a Fault Avoidance Zone (FAZ) for the Alpine Fault in its region. Aside from being able to more accurately define the location of the fault, the idea was to assist planning and development in the region in order to more appropriately limit, restrict or even prevent development from occurring. This is because the area buffering a fault trace zone is likely to be an area of intense deformation, and therefore very inappropriate for establishing structures which are likely to perform less predictably and have poorer life safety.

Impact of removing the FAZ)

Unfortunately, in 2017 Westland District Council, whom is responsible for consenting property developments in their district within the West Coast Region, was reported to have ignored scientific advice in deciding to remove the FAZ from Franz Josef - the only West Coast town built directly on top of the fault - even though it is recognized as the most serious in terms of life safety, hazard mitigation and post-event recovery. It has to be assumed that the reasons for this were principally economic.

Disclosure of the FAZ and the fact that the Alpine Fault has a high probability of rapturing almost certainly impacts negatively on property prices in Franz Josef. This has been confirmed through research undertaken canvassing the opinions of real estate agents and analysis by property valuers working in the area. The reported loss of value is a result of higher capitalization rates, especially in the commercial arena.

The impact of seismic hazard zoning on property values will vary based on the dynamics of the local real estate market. The availability of land outside the zoned area may also aid in the devaluation of property values in the affected area. However, amenities offered by the affected area (in this case tourism and related industries) may in turn, at least partially, offset any devaluations. It is interesting to note that some overseas studies on the effects of earthquake and volcano risk may not even materially affect recreational use - even where hazard notices are prominently displayed. Therefore, it could be argued that if tourism in New Zealand can be shown to be not overtly affected by hazard zone disclosure, then some of the negative impacts on the real estate market may in turn be offset.

Other related factors impacting the property market

On the flipside, lack of availability or increased cost of financing and/or insurance has a significant impact on the real estate market.  Financial institution’s reluctance to finance high risk properties and / or insisting on full replacement earthquake insurance cover as part of the collateral before approving a loan can certainly pose a problem. Increases in insurance premiums - an important part of seismic risk mitigation - will affect the market.  Certainly, where such costs cannot be absorbed or passed on to the tenant, the net cash flow of the property will reduce, and this will in turn impact on the value of the assets.

Conclusion - exercising duty of care

Putting aside impact on businesses and property values, it is hoped that administrators in other areas will recognise that an opportunity to mitigate risk in the light of some fairly solid research has been sorely missed. Ultimately, it will be a hard lesson to learn that you cannot contract out of duty of care.