10.05.2022 Buying Tips

How Does Climate Change Impact Property Prices?

How Does Climate Change Impact Property Prices?

With Waverley Council’s controversial flood risk ratings making the news recently, the impact of climate change on house prices has been top of mind for eastern suburbs property owners.

We take a look at what you really need to know about climate change and the property market.

Climate change and its impact on eastern suburbs’ property recently hit the headlines following the results of a Waverley Council flood study. But what does it mean for your property? We take a look at what you really need to know about climate change and the property market.

The Waverley Council flood study

The Sydney Morning Herald recently reported on the results of a Waverley Council flood study that has seen around 4500 local properties newly given a flood rating. Almost 3000 properties were given a ‘low’ flood risk rating, around 1400 a ‘medium’ rating, and 146 ‘high’. The remaining properties in the Waverley LGA were unrated or ‘no risk’.

The study, which began in 2018, was designed to inform the council’s development control plan (DCP), which regulates new builds and renovations. However, many residents who have received notification of their property’s flood risk from the council have been taken completely by surprise, especially since some of the properties given a medium rating have never flooded before. There are concerns about potential insurance premium increases and negative effects on property prices.

We know that climate change is affecting the world around us, but is it now impacting the property market too?

Of course, increased flood risk is not the only potential effect of climate change on property. Climate science shows that factors like frequent extreme weather, including storms and bushfire conditions, and coastal erosion from rising sea levels could also affect our properties.

Will climate change mean insurance premiums increase?

In some parts of Australia, yes. Property owners in climate change-impacted areas can expect their home, contents and landlord insurance to rise in coming years. The Climate Council predicts that 19 per cent of Australian properties could incur insurance premiums costing more than one per cent of their value by 2030. While in Queensland, that could mean as many as 52 per cent of local government areas (LGAs) are facing ‘unaffordable’ insurance premiums within the next ten years, here in NSW, the figure is predicted to be 23 per cent.

When it comes to the properties recently given a flood risk rating by Waverley Council, the SMH reports that Insurance Council chief executive Andrew Hall said that insurers generally have already priced flood risks into people’s premiums based on their own extensive data.

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Will property prices decline because of climate change?

The Reserve Bank of Australia anticipates that around 1.5 per cent of Australian properties will decline in value by 10 per cent or more due to climate risk by 2050. They say this figure will rise to 9 per cent by the year 2100. These predicted property price falls are largely based on the potential increases in insurance premiums.

Of course, here in Australia, we’ve experienced devastating natural disasters before, including the 2011 Brisbane floods and Cyclones Debbie and Yasi in Northern Queensland. CoreLogic reports show that while these events had an immediate impact on local property prices, the long-term impact was actually minimal.

Will the property market in Sydney’s eastern suburbs be affected?

The climate-linked property price declines predicted by the RBA are expected to be clustered in particular areas, mainly agricultural and coastal regions. The areas with the highest risk include parts of south-eastern Queensland and northern New South Wales, where many homes are at risk of coastal inundation.

The Reserve Bank uses a measure called Value-at-Risk (VaR) to make its predictions. The VaR compares the expected yearly cost of climate change-related damage with the replacement cost of the property. The RBA estimates a VaR increase of 0.4 percentage points equates roughly to a 10 per cent decline in property prices due to climate risk. The good news is that the RBA is not forecasting that any of Sydney’s eastern suburbs will experience an increase in VaR greater than 0.4 percentage points by 2050.

As for the property owners who have received flood risk notifications from Waverley Council, while they were told their rating would not change, Mayor Paula Masselos has recognised their concerns. She told the SMH she was taking feedback from property owners seriously. The DCP, which is yet to be finalised, will be reviewed by an independent flood consultant.

Thinking of buying or selling here in the eastern suburbs? Get in touch with my team today.