Environmental risks are higher on the property market agenda

Property buyers will need to pay more heed to future environmental risks

Fires, floods, and pestilence

Environmental risks will be given greater consideration by prospective property buyers. Bushfires and the recent floods have been very significant events in Australia, receiving international attention as well as local media coverage.

The recent floods in Queensland and New South Wales were variously labelled as once-in-a-century events. But given that Brisbane experienced flooding as recently as 2011 the risks will be seen differently in the minds of homebuyers, many of whom may not be old enough to remember the catastrophic flooding event in 1974.

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Climate experts have suggested that severe weather events may occur more frequently in the future, and this will change the mindset of housing market participants. These days we’re routinely asked to consider flood and fire risks when purchasing property for clients.

Flooding and erosion risk

Today’s buyers will consider evacuation routes as well as environmental risks such as coastal erosion. In recent years there have been some isolated cases of coastal erosion, for example in the Northern Beaches, now it seems that the number of potential events is increasing.

The Northern Beaches Council has reported that several beaches are classified as coastal erosion hotspots by the New South Wales Government, namely the beaches of Collaroy-Narrabeen, Bilgola Beach, and Basin Beach at Mona Vale.

A Reserve Bank of Australia paper on climate risks used a Value-at-Risk (VaR) model to assess risk, by measuring potential increases to an insurance premium. In the calculations used, a VaR of 0.5 per cent would be equivalent to an annual premium of $2,500 on a building that would cost $500,000 to replace.

The RBA has estimated that 3½ per cent of Australia’s dwellings may be exposed to elevated risk from climate-related events.

The RBA has estimated that 3½ per cent of Australia’s dwellings may be exposed to elevated risk from climate-related events – denoted by a ‘value at risk’ of more than 1 per cent – and this share of dwellings could increase to 8 per cent by the end of the century.

With the total value of the residential market now close to $10 trillion, this implies that up to around $½ trillion of dwellings by value may already be considered at a relatively elevated risk, mainly in agricultural and coastal regions.

Figure 1 – Suburbs projected to be at increased risk by 2050 / Source: Reserve Bank of Australia

Of course, some properties may be more seriously at risk of significant price declines and credit losses for lenders than others, with more than 250 mostly coastal suburbs identified by researchers as potentially being categorised as high-risk by 2050.

Understanding future risks

Such environmental risks should be understood and taken into consideration by property buyers and must be covered by insurance.  Riverside properties or dwellings with very close proximity to the beach may carry a higher level of risk, for example, and insurance premiums could run higher to compensate for this. In extreme cases, it may not even be possible to find a provider for insurance cover.

If forward-thinking buyers were to abandon higher-risk suburbs completely then the risks could become self-fulfilling, precipitating localised property price collapses. This alone suggests that buyers should think ahead and consider the risks of severe weather events, not only for the dwelling that they are buying but also for the local suburb or region. It’s probably not worth the sleepless nights to risk buying in a suburb that could be unduly impacted by severe weather events.

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