Thursday, January 13, 2011

Inundated houses



In the year following Hurricane Katrina, something unexpected happened to New Orleans house prices. They rocketed 27% over a period of months. According to USA Today "displaced residents bid up median prices".

This blogger thinks it unlikely that we will see such a dramatic price escalation in Brisbane. The floods are not as serious nor as persistent as those that afflicted New Orleans. The clean up will be more swift too. Another major difference is that this event is associated with a 20-30 year major La Nina. It is a climate system that is well understood and not indicative of a frequent danger. New Orleans, on the other hand, had been dodging hurricanes for years and there remains a very real prospect of another any given year.

So we can expect less damage and less displacement.

Nonetheless, in the short term, we might still expect flood inspired sales and movement. And in that sense there may be a pick-up in housing turnover and perhaps price shifts accordingly.

Following the Brisbane floods of 1974/5, the median price in the city did jump 19% (according to this Macquarie Univerity paper). This was well ahead of Sydney at 8%, Melbourne at 12.5%. But not far ahead of Adelaide at 18%, and behind Hobart at 26% (Perth figures are similar but appear unreliable).

This blogger is hesitant to conclude anything from these figures beyond the fact that the nation was caught up in a housing boom.

Following it's sudden 05/06 house price surge, however, New Orleans has faced sequential years of declining prices. Needless to say, this deflation mirrored broader falls in US housing. A condition playing out on a longer time frame here in Australia as well, with a particular concentration in and around Brisbane.

But there has been one factor in New Orleans that has effected greater falls at the top-end of the market that may play out in Brisbane as well. That is the cost of insurance.

Yesterday Business Spectator has a decent take on the likely economic fallout from the floods. But the one paragraph stuck this blogger as unrealistic was the insurance fallout:
To date the floods are located in more sparsely populated regions minimising the economic impact. Approximately 800,000 people live in the broad region affected by the flooding.

Robert Whelan, chief executive office of the Insurance Council of Australia estimates that while this is a major weather event, due to low population densities in the region, it is a moderate insurance event. Preliminary estimates suggest insurers will receive about 4,300 claims and pay out about $150 million. By comparison, the industry received about 161,000 claims and paid out about $1 billion dollars after a 20 minute Perth hail storm early last year.

The operative quote being "to date". According to the ABC, 3,000 homes were inundated in Ipswich alone yesterday and "already thousands of homes in some Brisbane suburbs have waters past the second-storey after Wednesday's peak". AP reported that in Brisbane, "a total of 14,600 homes and 2,800 businesses are expected to be flooded and at least 50 suburbs affected."

Thankfully, reports this morning suggest the flood is below 1974 peaks but the preliminary insurance estimate is still very optimistic. Insurance costs in flood-effected districts are going to rise.

The question is, will the inflation be so onerous as to accelerate price falls in top-end realty, as in the case of New Orleans?

Many of the flood effected areas of Brisbane are prime realty so it meets that criterion but the conditions of the flood explored above suggest that even though premiums will rise, the irregularity of the incidents should contain the inflation.

Again, some reassurance is to be found in the 1974 experience, in which there is no evidence of Brisbane median prices departing from national averages in the years after the flood.

This blogger will admit, though, this is speculation. The best it can offer at this stage is the observation that insurance premiums are worth watching. Any rise cannot help an already struggling market.

28 comments:

Anonymous said...

hydreAfter the '74 flood displaced householders had one thing, then, that they may not have now, that enabled them to 'go out and buy a replacement property' ~ available debt space. How much capacity does the average displaced householder have left to borrow, this time around? And with what equity after whatever insurance pay-out comes their way?

nmeau said...

I expect the following:

1 - An acute property shortage over the coming 12 months. Friends managing hotels and serviced apartments are besiged with desperate and crying parents looking for a place to live. This will be multiplied as the evacuation centres wind down. Spruikers will make the most of this situation - I expect huge headlines about soaring prices with plenty of gloating from industry representative and anyone with an undamaged house.

2 - Many, many Brisbanites do not have flood cover as the Wivenhoe Dam was designed to prevent another -74 event. I had oldtimers tell me this as late as Tuesday night, scoffing and dismissing the emerging disaster as "scaremongering". Tradies and some sectors of retail will re-live the golden days of the mid 2000's for a year or so, followed by a long-term slump as debt-financed reconstruction is completed.

3 - Tens of thousands of properties affected by the flood will loose value and be shunned by the market for decades to come. Unaffected properties will rise in relative value. Suburban medians will be all over the place throughout 2011.

I summary - a nauseating period of property boom & gloat i the midst of all the the misery, followed by a resumption of the long slide.

Anonymous said...

That's what people said would happen after the Christchurch earthquake-same relative damage. But it didn't! Because people were stuck in their damaged homes; couldn't sell-so couln't then re-buy, and the market has headed down, ever since.

Anonymous said...

Residents with destroyed houses will still own the land. One way or another there will be a house repaired or rebuilt on that same block of land.

Torchwood1979 said...

nmeau said "Many, many Brisbanites do not have flood cover as the Wivenhoe Dam was designed to prevent another -74 event."

Common misconception. The late father of a workmate designed the Little Nerang, Somerset, North Pine, Hinze and Wivanhoe dams. Wivenhoe was a flood mitigation dam, not a flood prevention dam. He also said that if there was a low which hung around long enough off the coast, plus heavy rain the catchment below Wivanhoe, 1974 flood levels would occur again.

He also said, Brisbane should be building at least one flood mitigation/storage dam a decade after Wivanhoe but local and state government corruption, real estate interests and environmental concerns took precedence.

Anonymous said...

@ Anon 9.44am - Would you buy on that land in, say, Brisbane, knowing that you have to keep an eye on the weather forcasts from now on? That's Christchurch's problem. No one wants to buy in the effected areas, regardless of the 'land' or the fix-ups ( that are going to take years) and so the market has ground to a halt. In our latest Quotable Valuations stats.(just out) - Chch is left out completely,as no one knows what true value is anymore.

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F Baldock said...

The biggest question in my mind is this...Will the authorities allow rebuilding in the areas which have been devastated??

The answer I fear is yes..The opportunity to collect rates and taxes on properties has priority over safety.

Frank Baldock

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