What is the impact of natural disasters on property markets?

As south-east Queensland and northern New South Wales recently grappled with cyclone Alfred, questions arise about how these disasters impact property markets.

The relationship between natural disasters and property values is more nuanced than many might expect, shaped by factors ranging from demographics to wealth disparities.

Recent research from Siddhant Saha, a student at the University of New South Wales examined the impacts of the 2019-2020 Black Summer bushfires in Sydney and this provides interesting insights. The study found that properties in bushfire-prone areas (BPAs) experienced price drops of 6-24 per cent in areas like Hawkesbury, while the Blue Mountains saw smaller declines of 0.2-5.2 per cent. However, these impacts were temporary, with most markets recovering within 12-24 months.

This pattern of short-term impact followed by recovery appears consistent across different types of natural disasters and locations. For example, following the 2011 Brisbane floods, affected suburbs initially saw value declines but by 2017 were achieving median prices well above their pre-flood levels. Similarly, Mallacoota, one of the worst-hit areas in the 2020 bushfires, saw house prices surge 70 per cent in just three years, driven significantly by COVID-19 driven population movements to regional areas.

The speed and extent of recovery often depends on several key factors:

1. Insurance coverage: Areas with higher rates of insurance coverage tend to recover more quickly, as residents have the financial means to rebuild. This creates a wealth disparity in disaster recovery, with more affluent areas often bouncing back faster.
2. Demographics: Interestingly, age plays a role in market resilience. Research suggests older residents are often more willing to remain in fire-prone areas, potentially due to stronger community ties and longer-term property ownership.
3. Government response: Areas that receive significant government investment in disaster mitigation infrastructure typically see stronger price recoveries. This includes flood levees, fire breaks, and improved emergency response capabilities.
4. Location desirability: Perhaps counterintuitively, many high-risk areas continue to command premium prices despite the threats they face. Riverside properties, coastal homes, and bush retreats often maintain their appeal due to lifestyle benefits that, for many buyers, outweigh the risks.

Recent Climate Valuation data highlights this dynamic, showing that even in areas where over 80 per cent of properties are at high risk of being uninsurable for flooding, most still experienced above-average price growth over the past five years. This suggests buyers may be underweighting long-term climate risks in their purchase decisions.

However, the market impact of disasters isn’t uniform across all regions. Queensland, for instance, has shown more price sensitivity to flood risk, possibly due to repeated major flooding events creating greater risk awareness among buyers. This regional variation suggests that frequent exposure to disasters may eventually influence buyer behaviour more significantly than isolated events.

The recent situation in south-east Queensland and northern New South Wales has highlighted another issue: the role of insurance markets. As insurance premiums rise in high-risk areas, property markets face new pressures. Properties with features that reduce insurance costs may begin commanding premium prices, while properties facing insurance challenges could see values impacted.

For property investors and homebuyers, these patterns suggest several considerations:

1. Short-term price impacts from disasters typically recover, but the timeline can vary significantly by location and circumstances.
2. Insurance costs and availability are becoming increasingly important factors in property values, particularly in high-risk areas.
3. Government investment in disaster mitigation can significantly influence long-term property values in affected areas.
4. Demographic and wealth factors play crucial roles in market resilience, creating uneven recovery patterns across different communities.

As climate-related risks continue to evolve, property markets will likely become more sophisticated in pricing these risks. However, the enduring appeal of high-risk locations suggests that lifestyle factors will continue to compete with safety considerations in driving property values. The challenge for buyers and policymakers alike will be finding ways to balance these competing forces while ensuring community resilience in the face of increasing natural disaster risks.