Currently this is not working, indeed. It’s not a good way to update an existing Haiku system with packages (package installation and deinstallation scripts may not be run, for example). It’s not really a great way to get a clean install, either.
I think we’ve been discussing this in a ticket on the bugtracker todecide what we want to do exactly. I’d say this should be considered as some kind of “recovery mode”, to fix a desperately broken Haiku install, but not as a normal upgrade way. So we may decide to overwrite settings and a few other system files in that case, to make sure we get things back into a bootable state.