The land in some parts of Christchurch is so badly damaged entire streets and even neighbourhoods may be abandoned completely.
Early indications suggest as many as 10,000 houses will have to be demolished, and more than 100,000 others need repairs, the Government said last night.
The Earthquake Commission has started land assessments and will begin assessing damage to houses this week. Fletcher Construction has already started emergency repairs to make damaged homes habitable.
"There will be some homes that cannot be rebuilt," Prime Minister John Key said, "and as a result of the second earthquake, there are potentially some sections and some areas of Christchurch which will need to be abandoned."
In some areas of the eastern suburbs hit by liquefaction, the land had actually sunk.
While Mr Key did not name suburbs, Avonside, Bexley and Dallington have again been badly affected by liquefaction which far exceeded the damage caused in last September's quake.
"The early indications are that some [liquefaction] is so significant we can't remediate it in any timeframe ... I don't know how large - it might be limited to streets but it might be larger than that."
The Herald has photographed numerous red-stickered properties, including a house owned by Peter Tyson in Avonside Drive.
It has come away from its foundations, is on a massive lean and looks like it could fall over at any minute. There are cracks in the front yard about a metre deep.
Mr Tyson said the house - one of five rentals he owns - was badly damaged in the first quake and he had recently got word that his insurers would pay $115,000 to repair it.
But after the February 22 quake, he is back to square one and said he would gladly consider any offers of help from the Government.
"It's only damaged because the ground has moved around the river. Once they have stopped the riverbed moving, it will be fine."
Mr Tyson rents the property out, but the tenant hasn't lived there since just before the September 4 quake.
"Luckily [the tenant] was away visiting her mother [on September 4]. Otherwise, she would have run out the door and had a three-foot drop. We're very lucky."
Mr Tyson raced to the house after the latest quake, but has not been back since. "It was a shock, it's a bit depressing actually. I don't know what will happen." Three of his other rentals also suffered severe damage.
The Government said geotechnicians were currently assessing properties section by section. It is not known how many of the homes earmarked for demolition are on unstable land.
Mr Key said the EQC and officials were working on alternatives to the commission's usual practice of paying the first $100,000 for damage to houses, the first $20,000 for damage to contents and an amount to repair damage to land within 8m of people's homes. Private insurers pay the rest.
The PM said affected homeowners might instead be offered a cash settlement. Another option was to offer homeowners a choice of a section and building plan in a new subdivision, "commensurate with the insurance model you had".
There were options in terms of subdivisions around Christchurch and Mr Key said the Government and the EQC might be able to secure some of that land and put together an "attractive" package for homeowners.
The Prime Minister acknowledged that it would be "very frustrating" for some people to move away from where they were currently living.
However, under the old model of assistance, they could have been out of their homes for two years anyway while their homes were demolished, remediation work to stabilise the land took place, and rebuilding was completed.
Furthermore, homes rebuilt on the same quake-damaged land could be uninsurable.
Asked about the cost of such a package, Mr Key indicated he hoped the Government would not have to contribute additional funding.
"By definition, I think we'll be in a position where the combination of EQC and private insurance will be enough to put them in a new home."
Last week, Earthquake Commission chief executive Ian Simpson told the Herald that the agency's exposure to land damage from both the September and February quakes was relatively small compared to its bill for damage to homes themselves.
An EQC spokesman said the commission's board met yesterday and was to discuss the issue of badly damaged land.
More details of the proposed scheme were likely to be made public in coming days.By Adam Bennett Email Adam, Anna Leask