How will the bushfire crisis impact property prices?

There is no escaping the effect the recent bushfire crisis will have on property prices, but an independent property research company claims the impact will depend on the state of the market in the suburb prior to the bushfires as well as how badly the areas were hit.

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

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

Property prices in areas where homes or infrastructure were destroyed were obviously more impacted, but RiskWise CEO Doron Peleg said the impact also depended on the state of the property market in the suburb before the bushfires (September/October last year), as well as what category the suburb fell under.

Short-term impact
Mr Peleg said a 10-20 per cent reduction was a conservative estimate for existing weak markets with no demand drivers or those that don’t have the right fundamentals for growth.

“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,” he said. 

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

Mr Peleg explained that without the bushfires, expected capital growth might have been, for example, 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.

That is to say, 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, (that is, the ‘normal’ projected demand if there were no bushfires).

“The stronger the property market, the lower the impact on dwelling prices,” Mr Peleg said.

“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.”

He said that in the next couple of years, it was highly likely there would 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,” he said.

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

Mr Peleg also 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. A reduction in the number of transactions. Also, there could be 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 which would have a huge impact on the attraction of the property.

Mr Peleg said it’s difficult to assess these regional areas when compared to 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,” he explained.

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

Insurance
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 in time, it is too early to estimate these changes, however, it is reasonable to assume they will be substantial. 

Already, the Insurance Council of Australia has raised bushfire claims figure to $1.34 billion and its figures show claims across the industry have surged to 13,750 – a number they expect will escalate in the coming weeks.

Investor demand
While generally the investor ratio in these areas is low, their demand is highly likely to decrease. 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 a 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 Prime Minister Scott Morrison has called for a Royal Commission and warned bushfires are “a new normal” – will definitely play a role in some high-risk areas and impact property prices.

In the medium to long term, RiskWise has previously found 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).

For example, RiskWise research into the 2009 Victorian bushfires 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 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.

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, Mr Peleg said there is now a big new variable – 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,” he said.

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 bushfire risk. 

For more information visit www.riskwiseproperty.com.au