Abstract
We test whether the major earthquakes in Christchurch (Canterbury, New Zealand) affected prices of earthquake-prone commercial buildings in Wellington, a city that was directly unaffected by the disaster. Specifically, we test whether official declaration of a Wellington building as earthquake-prone (with a requirement for remediation to minimum earthquake code standards) had an effect on sale price relative to similarly earthquake-prone (but yet-to-be-declared) buildings. We find that the price discount accompanying an earthquake-prone declaration in the CBD averages 45% whereas there is no observable discount on buildings yet-to-be-declared as earthquake-prone. Sale prices of currently-declared earthquake-prone commercial buildings in the suburbs also fell, but not as markedly. The sale probability of officially declared earthquake-prone buildings in Wellington rose markedly after the Christchurch earthquakes unlike the sale probability of yet-to-be-declared earthquake-prone buildings which fell slightly, reflecting buyer caution about such buildings. This pattern is indicative of forced sale of buildings following an official earthquake-prone declaration.
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Notes
Anecdotal evidence indicates that many corporate boards refuse to house their staff in buildings with poor earthquake ratings lest an earthquake occur and they are held legally or ethically responsible for any resulting deaths or injuries.
Anecdotal evidence indicates that different engineers can report disparate results with respect to code-compliance.
Grimes and Hyland (2015) show that binding credit constraints existed in New Zealand following the Global Financial Crisis which coincides with the post-earthquake period.
Sample size limits us to controlling for aggregate price trends rather than splitting up price trends prior to the earthquakes according to building type.
The building condition variable is constructed from variables describing both the roof and the building condition.
Given the presence of year dummies, the effect of this variable is estimated only on buildings sold pre- and post-earthquake in 2010. We tested whether we should instead use the date of the second (and more devastating) earthquake (11 February 2011). However, only one of the earthquake-prone buildings in our dataset was sold between the two earthquakes, and the impacts of changing the definition of this indicator variable were negligible.
Our data include only 2 sales of currently-declared earthquake-prone buildings prior to the Christchurch earthquakes so we do not attempt to interpret the pre-earthquake coefficients.
Commercial properties in the dataset that we received were selected based on a property category code that broadly describes the nature of the property, reflecting its highest and best use at the time of valuation. This may differ from the actual use of the property at the time. For example, there are multi-storey commercial properties in our dataset whose primary (but not necessarily sole) use is residential. Primary use is included as a control variable in all regressions.
There are three types of notices. A yellow notice is the standard earthquake-prone notice for general buildings. An orange notice is issued if the owner fails to comply with the conditions of the yellow notice, and a red notice is issued if the conditions set forth in the orange notice are not met. Due to the very low number of orange and red notices, we do not differentiate between various notice types.
Our estimation results are not significantly affected by dropping sales that are linked to multiple assessments.
Since some buildings are sold more than once their residuals may not be independent, so we cluster standard errors on buildings.
More informed buyers would offer a lower price and so do not become the successful purchasers.
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Timar, L., Grimes, A. & Fabling, R. Before a Fall: Impacts of Earthquake Regulation on Commercial Buildings. EconDisCliCha 2, 73–90 (2018). https://doi.org/10.1007/s41885-017-0019-9
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DOI: https://doi.org/10.1007/s41885-017-0019-9