flood real estate

If prices in a market economy are meant to indicate something about the risk and return ratio, then property prices in flood affected areas should be a big signal to the market. But an even tougher message is that people in low socio-economic areas suffer bigger falls than others. It’s a wakeup call for planners to become more serious about excluding development in vulnerable areas.

The relentless rain over south east Queensland and northern New South Wales in recent weeks has broken records, killed at least eight people and forced an emergency evacuation order.

New South Wales Premier Dominic Perrottet says that the flooding is unprecedented and set to worsen.

“This is a natural disaster of unprecedented proportions”

Dominic Perrottet

NSW Emergency Services Minister Steph Cooke said, “There is no gilding the lily here. “This is a natural disaster of unprecedented proportions for this region.”

So what’s the impact of the floods? Particularly on homes that families and investors have tied their money and their lives into.

Why are we experiencing such a wet summer?

The extremely wet summer that we are experiencing is strongly influenced by La Niña, the oceanic and atmospheric phenomenon that is the colder part of the broader El Niño Southern Oscillation climate pattern. 

During La Niña, east-west equatorial winds strengthen, allowing cold, deep ocean water to rise up to the surface in the East Pacific near South America, pushing warm ocean waters towards Australia. This increases the risk of summertime tropical cyclones and above average rainfall across north eastern Australia, according to the Bureau of Meteorology. The BOM is forecasting a rainy and humid autumn. 

But La Niña isn’t the only thing we have to blame for the seemingly constant rainfall this summer. According to the CSIRO, Australia’s rainfall is being driven also by the Indian Ocean Dipole and the Southern Annular Mode, which creates natural yearly variations.

Are we likely to see more floods in future years?

According to BOM, climate warming of around 1.47 °C for the 1910–2020 period is causing wet season (October-April) rainfall across northern Australia to increase since the late 1990s, with a trend towards high intensity short duration rainfall events. 

Across the rest of the country, particularly on its southern edges, the long term trend has been an overall reduction in rainfall across the country, but also with an increase in short duration heavy rainfall events.

What that means is we need to get used to flooding events. 

A recent article published on The Conversation compared ground soil to a kitchen sponge –  it absorbs water until it becomes saturated and can longer hold any more. That’s what’s happening across eastern Australia with the current flooding events.

Recent research by the authors of the article, from The University of Melbourne, found that during one week in March 2021, Sydney experienced the equivalent of 9.6 Sydney Harbours worth of high water vapour passing over it every day, meaning that the ground was already sodden and unable to hold any more rainfall, causing flooding to break out.

During one week in March 2021, Sydney experienced the equivalent of 9.6 Sydney Harbours worth of high water vapour passing over it every day.

The likelihood of these extreme “atmospheric rivers” happening in the future is high. According to the writers, if we continue down our current path if 2.7? warming by the end of the century, the chance of similar flooding events will become 80% more likely. 

That means we need to get used to the rain and flooding, and property owners must brace themselves for the impact.

The impact of floods on property 

Flood damage is revealed in cracked roads, wrecked cars, waterlogged basements, electrical damage and risks, disease risks, destruction of crops and livestock and debris scattered across the landscape. 

One widely circulated video last year was footage of a young couple’s entire house floating away in floodwaters, which is an extreme example of the absolute wreckage that severe flooding can cause to people’s homes, to property investors and even the value of the land itself. 

In fact, property prices are lower in flood-prone areas, even if the property itself does not flood, because of the stigma of the perceived risk. Research coming out of Germany and the US shows that flood risk is often a significant predictor of lower rental and sale prices.

But this isn’t always the case. Especially in Australia, where property prices are at record highs, far outpacing the rising incomes and only set to grow. 

Regulations around housing development and natural disasters

Regulations governing home and building development in areas at risk of natural disasters, such as cyclones, are in place in parts of QLD, Northern Territory, NSW and Western Australia.

For example in NSW, “All developments on land that is designated as bush fire prone has a legal obligation to consider bush fire and meet the requirements of Planning for Bush Fire Protection’, according to development regulations enacted in 2021.

And in Queensland the classic “Queenslander” house design is erected on stilts to keep it above the floodwaters. (Which works at least part of the time.)

Real estate advertising company REA Group after the floods last year called on authorities to carefully consider future moves to release land for homes in flood prone areas.

The Climate Council estimates that home insurance policies could become “effectively unaffordable” for one in 19 Australian homes by 2030.

The last time that Queensland saw extreme flooding such as this latest flood event was in 2010-2011, with 33 people killed and three missing (presumed dead), more than 30,000 homes and businesses damaged or destroyed, and an insurance disaster cost of over $2 billion.

An article we published at the time concluded there was a marked decrease in the value of property in both flood-affected and non-flood affected suburbs in the first quarter after the 2011 Brisbane flood, but these prices rose steadily in the following three quarters as memories and visual evidence of damage faded.

What’s interesting is that values are more strongly and negatively affected in lower value suburbs after flooding. After the Brisbane 2011 scenario, for instance, property values in those areas dropped 22.7 per cent.

“People in the higher-value suburbs had the means to repair immediately, the market didn’t see flooding as much of a detriment compared to low-value suburbs, because the visual impact of damaged homes was removed,” Property economics expert Professor Chris Eves from Queensland University of Technology told The Fifth Estate. “So the stigma of the flood wore off very quickly.”

Not so in lower value areas, where some owners found that selling at a reduced price was the only option.

Socio-economic factors

Socio-economic disadvantage and flood risk go hand in hand. People living in flood-prone areas have higher levels of social vulnerability, substance use, and at risk for physical and mental wellbeing, according to research from the University Centre for Rural Health in Lismore. 

The study last year found that people living in the Lismore town centre flood-risk area experienced significantly higher levels of social vulnerability (when compared to the already highly vulnerable regional population). Even before disaster strikes, residents in flood-prone areas may be more likely to battle with financial and health issues.

And the data shows a problem with underinsurance – which additionally highlights which areas should not be released for development for housing in the future.

Chronic underinsurance 

The damage caused by floods not only causes enormous financial pain and emotional pain, but it often leads to housing vulnerabilities, especially for those without insurance. 

The Climate Council estimates that home insurance policies could become “effectively unaffordable” for one in 19 Australian homes by 2030.

In Australia property insurance is not a legal requirement. Tenants are also less likely than homeowners to have home and contents insurance. 

23 per cent of Australian households are not insured, so about 1.8 million residential households. And up to 80 per cent of homeowners are underinsured. 

The Insurance Council of Australia (ICA) estimates that 23 per cent of Australian households are not insured, so about 1.8 million residential households. Adding to this, the Australian Securities and Investments Commission says that up to 80 per cent of homeowners are underinsured. 

In flood affected areas premiums for houses can range from $30,000 to more than $150,000 a year. 

In March of 2021, the Insurance Council of Australia (ICA) declared an insurance catastrophe after more than 5000 claims were lodged during one weekend following extreme rain and flooding in NSW. 

This year insurer Suncorp says it’s has already received more than 5000 claims related to heavy rainfall and flooding across southeast Queensland and northern NSW. It expects the cost to be at least $75 million. 

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