Major bushfires: The environmental risk will have a major impact on property prices

The recent bushfires will have a major short-term impact on property prices, however, much of the impact will depend on the state of the market in the suburb prior to the bushfires as well as how badly they were affected.Risk Concept

RiskWise Property Research has identified three ‘severity’ categories with greatly varied impacts on property prices and their duration.

3 Categories of impact:

  1. The highest category is 152 suburbs where homes or infrastructure destroyed in the recent bushfires.
  2. The second category is 537 suburbs where homes under threat and/or evacuations undertaken in the recent bushfires
  3. The third one is areas 1,654 suburbs where alerts/warnings were given regarding potential escalation in the recent bushfires.

Obviously property prices in areas where homes or infrastructure were destroyed were more impacted.

Short-term impact

This impact also depended on the state of the property market in the suburb “before the bushfires” (i.e. September/October last year) as well as what Category the suburb fell under.Invest Risk

Existing weak markets with no demand drivers or those that don’t have the right fundamentals for growth could be hit by 10-20 per cent reductions as a conservative estimate.

And this impact will last at least a couple of years depending on the restoration of the area – even three to five years if these are repeatable events, in other words subject to further fires in the future, which might potentially have a long-term impact on some areas in Australia.

On the other hand, if the area had existing greater demand overall (i.e. a good property market) prior to the fires and they fell under Category 3, the impact would be modest.

In other words, e.g. without the bushfires, expected capital growth might have been about 5 per cent, but with the fires there would be a negative 1-3 per cent impact ‘than otherwise’, making the expected capital growth between 2-4 per cent.

The impact on property prices depends on the actual effect of the bushfires as well as the demand for residential property in the area before, and regardless of, the bushfires, i.e. the ‘normal’ projected demand if there were no bushfires.

The stronger the property market, the lower the impact on dwelling prices.

Further, the recovery period in strong areas is highly likely to be shorter.

Vice versa, areas that already experienced weakness in the property market prior to the bushfires will be more impacted by the recent events.

In the short term (at least a couple of years), it is highly likely there will be price reductions and significantly reduced demand for areas in Category 1 and for weak markets in Category 2.

Buyers are likely to negotiate hard and require major discounts to reflect the risk of additional bushfires in the future and that it will potentially be harder for them to sell their properties down the track.Property Investment And House Mortgage Financial. Risk Managemen

These results were similar to what RiskWise saw based on previous research into the 2009 Black Saturday Victoria Bushfires and the 2011 Brisbane floods i.e. that in the short term there was definitely a major impact on demand and dwelling prices.

In addition, he said it could be difficult measuring dwelling price changes for the following reasons:

  1. Properties are sold following massive renovations and upgrades, so it looks as if there is a price increase but, in many cases, the ‘before’ property was below or average in condition and the ‘after’ property is fully renovated and modern.
  2. RiskWise expects to see a reduction in the number of transactions.
    Also, there could be very specific factors such as relative proximity to a certain national park which was severely hit or proximity to areas in Category 1 that got a lot of media attention – and this would have a huge impact on the attraction of the property.
    It’s difficult to assess these regional areas when compared to e.g. if it was a large number of similar properties in a metro area.

We also have to remember there are three different impacts (categories) and we can’t completely ignore Category 2.

During the analysis some of the areas that were Category 2 became Category 1, making this a tangible risk not a theoretical risk.

The extent of the damage has been catastrophic with 2,779 homes lost (an estimate as of 14 January 2020, according to various news sources) and more than 2300 suburbs impacted so far.

The economic damage from the bushfires devastating Australia’s eastern seaboard is likely to exceed the record $4.4 billion set by 2009’s Black Saturday blazes, Moody’s Analytics has said.

Insurance

The Insurance Council of Australia has raised bushfire claims figure to $1.34 billion.

Its figures show claims across the industry have surged to 13,750.

The insurance industry group is expecting the number of claims to escalate in the coming weeks.

A secondary consideration is expensive insurance premiums.

While not at the same scale in relation to the value of the property, they will still have a material impact on the ongoing out-of-pocket expenses of buyers.

At this point of time, it is too early to estimate these changes, however, it is very reasonable to assume they will be substantial.

Investor demand

While generally the investor ratio in these areas is low, their demand is highly likely to decrease.Avoid Risks

  • First, there is now a higher equity risk that property values will underperform the market (at least in the short term).
  • Second, investors will likely carry materially higher insurance premiums.
  • Third, they are now facing a risk that there would be additional bushfires in the future, which means potential evacuation, risk to the property and significant effort to deal with potential damages.
    Investors have strong preference for peace of mind and are willing to pay 5-6 per cent of the rental income for a property manager.
    Investing in areas that carry a high risk of bushfires doesn’t align with that pattern.

Rental market – short term

In the short term it is likely that areas in Category 1, where houses were lost, will experience stronger rental demand and potentially higher rental prices.

This is now a social consideration, rather than a financial one, as landlords in some areas are in a good position to materially increase the rent.

Medium and long-term impact

The medium and long-term capital growth strongly depends on similar events.

The scale of the current bushfires and the concerns that this will become a continuous problem in the future – especially given the PM Scott Morrison has called for a Royal Commission into the bushfires and warned they are “a new  normal” – in some high-risk areas will definitely play a role and impact property prices.

In the medium to long term, what we have found in our previous research is that the key driver is the location of the impacted areas in relation to employment hubs and to the general demand for properties in the broader area (SA4 or captial city). eg RiskWise research into the 2009 Victorian bush fires showed: Murrindindi and Nilumbik, around 50km from the Melbourne CBD, delivered on average 55.6 per cent growth in the past five years.

RiskWise found that the key factors that do impact medium and long-term capital growth for areas that are subject to natural disasters are the location and fundamentals such as proximity to the CBD, schools and infrastructure.

It basically depends on the popularity of the areas.Assess The Risk

RiskWise found each of the natural disaster areas that were closer to the CBD delivered higher capital growth than areas that were a greater distance from the CBD.

However, there is now a big new variable i.e. repeatable events in the same area.

Many people are concerned these fires are not a one-off event.

It is important to understand that people do not want to risk their lives or the lives of their loved ones, irrespective of discussions regarding global warming. Repeatable large-scale events are likely to have a sustained impact on the demand.

If there are more major bushfires in the next few years this is highly likely to have a sustained impact not only on the currently-impacted areas, but also on many areas that carry a bushfires risk.

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Doron Peleg

About

is the CEO/Founder of RiseWise Property Review. He has more than 20 years’ experience in risk management including, Co-Founder of Peleg, Kessel & Co, an assurance and advisory accounting firm & Executive Manager at Westpac Banking Corporation in Sydney. www.riskwiseproperty.com.au/


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