Environmental risks should be on homebuyers' agenda
27 Jan 2021

Except in isolated cases, bushfires, and other environmental risks, such as floods, have not had a material impact on homebuyer demand in Australia to date. 

This, however, might change dramatically over the decade ahead.

In the past dozen years Australia has experienced several major natural disasters, including the 'Black Saturday' fires in 2009, the Brisbane floods in 2011, and the unprecedented Australian bushfires at the end of 2019 and in the early part of 2020. 

In addition, rising sea levels, with the possibility of catastrophic consequences, have received much attention. 

While the impact on the demand for dwellings and consequently on property prices have tended to improve over time, in many cases there has been a short- and medium-term impact on dwelling prices, as well as significant sustained impacts on insurance premiums. 

Bushfire risk

There are large number of areas that have been impacted by the recent bushfires, with catastrophic impacts on lives and properties. 

The most impacted SA4s (Top 10)

State

SA4 Name

Number of impacted suburbs

NSW

Mid North Coast

294

VIC

Hume

273

NSW

Capital Region

196

NSW

Richmond - Tweed

192

NSW

Southern Highlands and Shoalhaven

164

NSW

Central West

154

NSW

Riverina

138

NSW

New England and North West

128

VIC

Latrobe - Gippsland

116

NSW

Coffs Harbour - Grafton

111


It should be noted that some of the impacted suburbs are in areas that had been also impacted previously, such as the Blue Mountains in Sydney, and as such are considered higher-risk areas. 

In Melbourne, the following areas are classified as high-risk areas: North East, South East and Outer East. 

It should be noted that the demand for properties in bushfire-impacted areas has generally been impacted in the short term, with a recovery over the medium to long-term. However, areas that are impacted severely enjoy lower popularity, tend to experience muted demand on an ongoing basis. 

While over the past year more preventative measures have been taken, and fortunately we have not experienced widespread or major bushfires, the ongoing risk of large-scale bushfires remains elevated.  

This has an impact on people's lives, demand for properties, and insurance policies, that could be very substantial.  

Flood risk (rivers)

It seems that the 2011 Brisbane floods are becoming a distant memory which is sinking fast, as median house prices float to the top. 

Analysis by RiskWise Property Research has shown that in 19 of the 20 suburbs affected by floods, houses have outperformed the rest of the city. Such suburbs include Fig Tree Pocket, Bulimba, Yeronga, New Farm, and Tennyson. This equates to 95 per cent of the major 20 flood-affected suburbs.  

Immediately after the 2011 floods the perception among property buyers was these areas may be perceived negatively and prices would fall, or at least deliver poor capital growth. In addition, insurance premiums increased materially, with annual premiums frequently reaching the 5-figure mark. Consequently, after the floods the demand for properties in flood-prone areas was lower.

However, over time the demand has improved substantially. One reason for this is that flood-risk areas are often located on the river, with waterside locations typically being popular in Australia. 

The increased flood risk and the insurance premiums created a clear 'risk versus reward' equation: higher risk and higher insurance premiums with projected higher capital growth. 

However, the big question remains: was the flood risk a once-in-50-year event, or will we see major floods more frequently?

Rising sea levels

Rising sea levels, with the possibility of catastrophic consequences, have received much media attention.

In a research published in Nature Climate Change in March 2020 the authors concluded that Australia is going to lose (beaches will recede by more than 100 metres) about 40 per cent of its beaches over the next 80 years. 

Strong media attention in relation to extreme weather suggesting that waterfront properties face rising risks of coastal erosion and examples or erosion after storm in popular areas such as Collaroy. This might have, over the longer term, an aggregated impact on the demand for beachside properties. 

In addition, insurance policies are likely to increase further to reflect that risk.

In summary, while the future is uncertain, homebuyers should certainly factor environmental risks into their considerations when making a purchase, and not let their excitement or emotions take control.