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Flooding the market: Will waterfront properties keep their value?

House in flood waters, aerial shot
The real estate boom may insulate house prices in flood-zones initially, but over the long term, higher insurance premiums may take a toll. (Source: Getty)

Because many of us fantasise about homes overlooking rivers, lakes and oceans, waterfront properties are typically the most valuable.

But without significant investment to raise homes out of harm's way and protect communities with levees and dams, some experts are concerned increasing flood risk caused by a warming climate will start to erode the value of some waterfront homes.

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Tom Davies, who led the development of the Insurance Council of Australia’s climate change action plan, said floods were concerning, given our affinity for clustering towns around attractive bodies of water.

As these towns grow to accommodate increasing populations, Davies said developable land could start to run short and new homes would be forced to spill over into less hospitable places, such as flood plains.

Sydney, in particular, has sprawled into some hazardous zones, including the Hawkesbury-Nepean area, which was battered in the most recent round of severe flooding.

The consequence of building in these flood-prone areas, he said, were higher insurance premiums, as insurance companies weighed up the increasing risk.

This has already started happening in Australia, with the latest flood disaster in Queensland and NSW tipped to increase insurance premiums by 10 per cent next year.

Davies expects banks, which lend money to people to buy homes, will also start responding to increasing flood risk.

With mortgages stretching over 30 years, an asset in a flood zone today is only likely to be at a higher risk of flooding as time goes on, so lenders may start factoring in these future vulnerabilities.

“So, looking to a climate-changed future, where there will almost certainly be increased frequency and intensity of natural-hazard events, can we expect the price of assets in exposed areas to remain the same?” he asked.

“Equally, can we expect insurance companies to provide their service for the same price? The answer surely is no.”

Real estate boom may insulate prices

Real estate agents predict any softening of house prices in flood-prone areas will be short lived, given the high demand for homes.

Real estate agent Niki Meads, based in Gympie north of Brisbane, said, given the region’s reputation, buyers were generally conscious of flood risk.

However, she said flooding concerns receded during the latest housing boom because the market had become so competitive that these concerns had taken a back seat.

She imagines flood zones will become top of mind again after the most recent floods.

Brisbane real estate agent Jack Dickson also noted the flooding occurred in a very different market compared to 2011, when floods devastated the city.

Back then, the market was quite subdued, so the flooding only dampened real estate values further.

This time around, the flood has hit Brisbane in the city’s strongest ever property market. That’s why Dickson thinks any dip in property values in the region will be short lived.

He said people were initially very vigilant about flood risks after flooding events but interest tended to drop off as the years passed.

He also said buyers varied in their reaction to flood risk. Some “won’t even look” at a property that’s been flooded, but there are a number of others prepared to take the risk, as long as the home is appropriately discounted.

Adaptation already occurring

Homeowners are already starting to respond to flood risk by either lifting their homes above likely flood heights or accounting for increased flood levels in the first place.

People will also keep their habitable areas on the top floors so if water does pass through, less damage is done.

And, on sloping parcels of land, it may be possible to rebuild a home on a more elevated part of the plot.

Davies said these sorts of strategies were being adopted in some places, and should be adopted Australia-wide to protect vulnerable homes.

He said they could be encouraged by policy-makers through design guidelines and building codes.

The other option is mitigation at the community scale, which includes dams and levees, to protect communities. He said these structures could save communities millions in losses.

In particularly high-risk areas, Davies said homes just should not be built.

“Ultimately, we’ve just got to stop building homes in floodplains, and the only way to stop them flooding is to stop putting them in harm’s way,” he said.

Davies stressed that homes were typically the most valuable assets most people would ever buy.

“We should do our due diligence and consider the risks of damage to increased frequency and intensity of natural hazards in a climate-changed future. It is what’s sensible,” he said.

“The later we leave it, the more of an issue it's going to become.”

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