Can bushfires affect the real estate market? :REAL ESTATE

Given the heavy rainfall in NSW and the drastic reduction in the number of active fires in the state, there are now two potential disruptive factors for the real estate market. They raise the question of what influence increasingly serious and recurring weather events can have on the real estate market and whether they are already having an effect.

This summer, more than 11 million hectares were destroyed by bush fires, while in the summer, more than 2,000 houses were lost by fires.

While these fires and the advent of the corona virus have been classified as two major potential impacts on the Australian economy in the short term, how are these fires affecting the real estate market or will they have any significant impact at all. While many homes have suffered structural losses, much of the destruction in the scrubland has occurred inside and outside of national parks, complicating the risk of fires that can have an acute impact on the property market.

How do insurance premiums affect fires more and more frequently?

Since September last year, around 8,500 claims for damages totaling $ 700 million have been made to insurance companies. The Insurance Council of Australia, led by CEO Rob Whelan, warned the Australian government in January that insurance premiums could rise due to these events without effective adjustment and mitigation. This includes measures such as re-evaluating where we live and preparing for future forest fire effects.

Climate risk analyst Karl Mallon wrote a report in 2019 with the Climate Council “Compound Costs: How Climate Change Damages the Australian Economy”Given that the property market could lose value by 2030 due to climate change and the resulting extreme weather, $ 571 billion.

The report expanded this projection to estimate a loss in property values ​​due to climate change of $ 770 billion by 2100. However, these projections focus on the effects of floods that are more than fires. While the 2018 Commonwealth Bank’s annual report listed the effects of floods, floods, bushfires, soil narrowing and wind as potential effects on the major bank’s loan portfolio and insurance premiums, floods / floods were considered the most significant.

“Real estate with high risk will only make up 0.01% of our portfolio in 2020 (in terms of balance),” the report said. “If our lending does not change in these areas, the share will increase to around 1% by 2060.”

“Locations that are at risk from climate change are likely to incur higher maintenance and damage costs, leading to higher insurance costs due to floods, storms, bushfires, and droughts. Sea level rise is likely to see the largest increase.”

Structural damage caused by fires, which is relatively minor compared to flooding, poses less direct risk to the insurance industry and property prices, but there may be great potential for indirect effects.

Does a bushfire affect real estate prices?

The same report by the Climate Council warned that the effects of climate change could potentially wipe out $ 571 billion in property values ​​by 2050, while the Actuaries Institute warned that every tenth house could no longer be insurable due to climate change by the end of the century , However, predictions like this are more difficult to make if you consider how (technological advances, slowdowns, adjustments) and where we will live in the future if we continue to anticipate increasingly extreme weather events.

In the short term, there are more indirect effects on property prices that may be more difficult to measure. These include burdens on living standards, industry and companies, which can have a cumulative impact on the markets. For example, air quality in Canberra was so poor during the 2019/20 summer fires that in early January the Department of Internal Affairs, which oversees Australia’s response to disasters and emergencies, was forced to temporarily shut down its offices while maintaining health effects Canberra’s impaired air quality is not yet known. The Washington Post reported that the number of emergency admissions for asthma and breathing problems in Sydney “increased by more than 34 percent year-on-year between December 30 and January 5”.

This increases the potential for people to think about their future options and look for new goals that are less prone to such risks (although, as observed with Rauch in New Zealand, this can be difficult to avoid). It is unclear whether this affects prices.

Similar indirect effects could be observed when looking at industries such as tourism, which are affected by these volatile summer seasons when they expect peak tourism figures and depend on them. When tourism and related small business industries are affected by repeated seasons, like last summer, it can impact commercial and residential property markets.

The rental system faces short-term pressure in times of severe natural disasters when people who are driven out of their homes need immediate life alternatives. As part of the recovery from natural disasters such as fires, those who can afford to repair and rebuild faster than others can financially get back on their feet faster, which may worsen market inequalities. This is not confined to individuals, but to entire communities, such as those on Kangaroo Island, which experienced severe fires that damaged almost half of the island.

Finally, as part of a growing awareness of the heightened risks from intense fire times, there is the potential effect of increasing demand for houses in urban centers and reduced demand for houses in regional markets, widening these price differences between urban and regional markets.

In the short term, however, the fires appear to have had little impact on regional markets. Corelogic data for housing values ​​in December showed growth of 0.5% compared to the previous month for regional NSW, 0.7% for regional Vic and 0.8% for regional Qld, despite the major fires. It may be too early to assess the impact of the fires on the regional areas of the most affected countries. Larger market forces could have played a bigger role in house values ​​in the short term, such as rate cuts, loosening of loan processing guidelines and the fact that standard mortgage rates have not been as high since November 1960s as in November. The rates were 4.8%, compared to a peak of 17% in November 1989. The capitals on the east coast were not affected by bush fires, which is not surprising as the values ​​in Sydney have risen by 8.2% since the soil was found in May 2019.

The past bushfire season shows that the economic considerations of the most important industries, such as The banking sector, for example, has moved from abstract calculations in the annual reports to actual effects on regular homeowners and that calculating the effects of increasingly volatile fire times is more complicated than just looking at the areas directly affected by bush fires.

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