However, a senior council manager has vowed any claim would be "vigorously" defended, setting the scene for a possible fight through the courts.
The council wrote to the owners of the property at 36 Leithton Close, in Glenleith, last week to request more information, but declined to respond to their concerns.
Instead, the letter from council development services manager Kevin Thompson, advised the matter was now in the hands of the council's solicitors, given a claim against the council was "likely".
The owners, Michael Beazley and opera singer Deborah Wai Kapohe, who have two young children - wrote to the council last month after discovering moisture, cracks, leaks and toxic mould in their home.
They said the damage was due to design flaws and building faults overlooked when the council issued the home a code of compliance - certifying it met Building Code requirements - in 2005.
The couple wanted answers to a series of questions about the council's building inspection process, and asked for a "safe house" to live in - paid for by the council - while their own home was repaired.
Mr Beazley said yesterday the council's refusal to discuss their concerns was "really disappointing".
The couple have lodged a claim with the Weathertight Home Resolution Service (WHRS), but would decide "shortly" whether to make their own claim through the courts for compensation and costs, Mr Beazley said.
That would include recovering the $569,000 quoted for repairs, as well as legal fees - which could reach "a couple of hundred thousand dollars" - and other expenses, Mr Beazley said.
Council city environment general manager Tony Avery questioned the size of the figure when contacted, but warned the council's solicitors would be "vigorously defending" any claim.
The couple's decision to take their case to the WHRS, as well as the Otago Daily Times, meant the council would not be responding to their concerns until the process was complete, he said.
"Until the [WHRS] process is worked through, we're not sure about the extent of the problem that they have or the remedial action that might be required.
"But council will be vigorously defending any claim and would also note that there are other parties that potentially are involved - the builder, the designer, the previous vendors and others.
"I know these people have a view, but we will be vigorously defending the council's position."
Mr Beazley confirmed the council would be the primary target of any court action, because "we have to".
"There's no other options open to us ...
"They have the deepest pockets."
The couple bought the house in December after obtaining a land information memorandum (LIM) which showed it had a code of compliance certificate from the council.
Days after moving, the couple say problems with the home began to emerge.
Since their situation was reported in the ODT earlier this month, more bubbling had been discovered in ceiling paint - indicating the presence of moisture - along with a leak dripping through electrics on to their microwave oven, Mr Beazley said.
The family would be forced to leave the house within the next month if its condition continued to deteriorate, he believed.
The couple had recently moved to Dunedin and planned to study at the University of Otago this year, supported by Ms Wai Kapohe's scholarship, but Mr Beazley's study plans were on hold.
A WHRS assessor visited the property yesterday, but results were expected to take several months and repairs a further six months.
An Auckland-based recladding specialist from Reconstruct has already inspected the home and quoted $563,000 for repairs.
The company's managing director, David Holloway, last month told the ODT the home was at the "moderate to severe" end of the spectrum of about 500 leaky homes his company had dealt with, mainly in Auckland.
The couple had a "reasonably strong" case against the council, as well as other parties involved in its construction and sale, he believed.
Last year, council staff confirmed claims made by five home owners had resulted in two payouts for leaky-home damage, together worth $182,000, after council building inspectors missed faults.
Mr Thompson said at the time it was unlikely the council would see a flood of claims in future, but Mr Holloway last month warned the latest claim could be the tip of an iceberg in Otago.
