Home buyers are still willing to pay top dollar for waterfront views and bush frontage but a landmark report suggests it won’t always be the case.
Riverine flooding, coastal inundation, bushfires, wind storms and droughts that can crack walls will eventually catch up with property markets, according to Australia’s first-ever national assessment of climate risks.
Under a worst-case scenario, extreme weather events are estimated to hit values by $570 billion by the end of the decade.
Losses could climb to more than $610 billion by 2050 under 3C of warming – a temperature rise the Australian Climate Service views as “prudent” to prepare for – as buyers opt to pay less for risky dwellings, banks value them accordingly and insurance costs trend higher.
The numbers assume little is done to adapt to changing conditions, with estimates far from set in stone.
Senior researcher at Western Sydney University’s Urban Transformations Research Centre, Ehsan Noroozinejad, says known and recent events, such as flood risk, were already priced into property markets “to some extent”.
“But future risks, like sea-level rise or low-salience hazards are only partially or not at all capitalised into prices,” he tells AAP.
A compelling explanation for the resilience of many climate-vulnerable homes is that they often come with attractive lifestyle perks.
Waterfront views, for example, always command a price premium.
“Memory fade” after disastrous events, poor knowledge of climate risks and few houses to choose from can also keep upwards pressure on home prices in areas vulnerable to weather extremes.
Even in Lismore, the NSW town at the centre of the costliest disaster in Australian history, property prices have proven resilient.
They dipped immediately after the devastating 2022 floods, and while still 6.7 per cent off record highs have since been trending higher based on figures provided by Cotality.
Sales activity is now back to long-run averages after a spike following the disastrous weather event.
While government buybacks have likely helped keep heat in the local market, Cotality views Lismore as a place where people will continue to buy after a natural disaster.
This, the researchers say, is likely in part because of the affordability challenges posed by relocating.
Committee for Economic Development of Australia senior economist Liam Dillon says chronic housing shortages are a major driver of home values, including in many climate-exposed locations in the regions and on the coast.
In line with Monday’s sobering risk assessment, Mr Dillon expects climate risk to become a bigger price-driver going forward, particularly when sea level rise begins leaving vastly more homes exposed.
“There’s two forces acting there – one is the intensity of what’s playing out in terms of those disasters and then the other one is the number of houses or properties exposed,” the economist explains.
Insurance costs are the biggest pain point.
Rising premiums are already influencing home values in a few highly vulnerable locations and insurance affordability and accessibility problems are only expected to worsen.
The climate report estimates 8.2 per cent homes, or 751,000, are in high-risk areas, while 8.7 per cent are in very high-risk areas.
By 2090, more than 1.2 million homes could be deemed at very high risk.
Rising insurance premiums could erode property values by as much as 10 per cent in some instances, Dr Noroozinejad says.
Affordable suburbs will likely feel the squeeze of rising insurance costs first, says Ray White chief economist Nerida Conisbee.
The premium end of markets are typically better able to absorb the costs of surging insurance, she explains.
Adelaide Hills is a good example, with higher-income buyers still flocking to the region for its natural beauty and proximity to the city despite its high exposure to bushfire risk.
After a disaster, wealthier households are also more likely to be able to afford a resilient rebuild, such as an elevated dwelling that avoids flood waters.
A gap between perceived and actual risk is another problem.
Mr Dillon says the economic think tank’s research suggests Australians may be underestimating the risks they face from natural disasters.
Less than one per cent of homeowners believe they are at high risk of flood, for example, compared to about 4.4 per cent of homes with at least a one-to-five per cent annual probability of inundation.
The think tank believes a lack of easily accessible, digestible information is a big part of the problem that could be easily addressed by governments.
There is also an argument for strengthening mandatory or natural hazard disclosures at the point of sale, Mr Dillon says
It’s a view shared by the Productivity Commission, which has called for a resilience rating to stop buyers overpaying for climate-vulnerable homes and to incentivise sellers to invest in resilient home upgrades.
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