How Climate Change Affects the Property Market in Australia
Updated: Apr 2, 2022
How climate change affects property might not be the first question that comes to mind when you're looking to buy a new home. But more and more homeowners and investors are beginning to realise the importance of the natural environment and global warming on the value of their properties - especially if they're looking to buy real estate in Australia.
And, they’re going to have to. The Reserve Bank of Australia announced in late 2021 that there are over 250 'high risk' suburbs. Property values could fall in those suburbs if the country’s banks ignore climate change. That's especially the case for Brisbane and the Gold Coast. Perth, Melbourne and metropolitan Sydney are also at risk.
But why is this the case? What is the connection between climate change and falling property prices? Why should climate change matter to the astute property investor? The answers to these questions can be found below.
Climate change and Australian property
The latest report on the effect of climate change in Australia is gloomy. This country is expected to experience the worst effects of global warming, including coastal erosion due to rising sea levels, more bushfires as well as longer and hotter summers.
The statistics are daunting. About 3.5% of homes in Australia fall under an international definition of being at the highest risk. Our property market’s value is currently valued at $9 trillion, but the Climate Council reports that $571 billion of that value will be wiped out by 2030 if properties continue to be exposed to the effects of climate change.
Today, the country is experiencing extreme weather because of climate change, and rising water levels threaten housing and infrastructure. The Council projects that property damage will reach $611 billion by 2050, and $770 billion by 2100.
Extreme events like heat waves, droughts, floods, and cyclones are expected to hurt agriculture and food production in Australia. Australia is also experiencing reduced agricultural output and profit, and farm profits decreased by 23% from 2001 to 2020. The inherent link between agricultural property value and the impact of climate change isn’t hard to imagine.
How climate change affects Australian property
Global warming, extreme heat and rising sea levels - it’s not hard to imagine how this can impact property.
Aussie households face a dramatic risk of $25 billion worth of damage from hazards related to climate change. Forest fires, the subsistence of soil, the inundation of our coasts, flooding and cyclones - it's not surprising that the damage costs are estimated to escalate by 257% from 1990 to 2100.
Here’s some reasons why global warming and climate change has such an impact on Australian property.
Falling property value
The Reserve Bank of Australia reported that house prices are expected to fall by 10% in many regions by 2050 due to climate change. Properties that are affected represent 1.5% of all homes in Australia, and that number will increase to 9% by the year 2100.
This decline in value is concentrated in coastal and agricultural regions, especially in northern NSW and southeast Queensland. These regions have a colossal number of homes at risk of coastal flooding.
Increase in insurance premiums
In addition, insurance premiums will rise. According to the Climate Council, one in 19 homes are at risk of facing “unaffordable” premiums by 2030. Currently, the insurance premiums in Northern Australia are four times that of the national average.
Insurance premiums are calculated based on risk. As insurance providers receive more claims related to weather-damaged properties, premiums also face upward pressure.
Allianz, for instance, reported that natural disasters account for 35-40% of their losses. If cyclone weather moves south because of the rising temperatures, insurance companies in this region may also raise their premiums.
Impact on urban environment
Suburbia and agricultural properties are not the only ones at risk. According to the Australian Sustainable Built Environment Council, climate change has the potential to damage urban cities.
It’s not hard to imagine - compound heat in urban environments can create “heat islands” on hot days. As a result, building materials can fail and degrade at a much faster rate , and properties could be damaged due to storm surges and increased coastal erosion.
We have seen the catastrophic impacts of these events in many coastal regions in Australia. Some regions in the country are particularly prone to bushfires. We have seen the disastrous bushfires that ravaged Canberra in 2003 and Victoria in 2009. Houses and buildings were savagely burnt, leaving behind leaking gas, damaged electrical wires and completely devastated communities.
Banking loan risk (and high interest rates)
Australian banks are exposed to risks associated with climate events in relation to potential credit losses. They’re especially weary of the effects of climate change on mortgages, which account for around two-thirds of their portfolios.
Banks lend people money using the current value of their homes as collateral. If those values do not fully reflect the long-term risks associated with climate change, real estate prices may decline - leaving banks vulnerable to losses due to borrower default.
Home loans therefore may get more expensive - meaning a rise in interest rates. In 2021, treasurer Josh Frydenburg warned that borrowing costs will rise unless the country embraces a zero emissions target by 2050.
Will property still be profitable once climate change has shown its effect?
The property market is a hot topic right now because of skyrocketing prices. However, in the face of the effects of climate change, will it be wise to invest your money in real estate?
The answer is probably yes. Generally, the value of property will always steadily increase. You just have to play your cards right, and choose the right places to make your investment. The astute investor will need to look at locations where governments are implementing measures to protect communities from the harsh effects of climate change.
Be careful of places that are prone to climate emergencies. Places like Melbourne's Hume and Perth's Belmont are seen to be "heat islands", a term which is discussed above. Brisbane, Townsville and the Central Coast are seen to be flood risks. While places like the town of Stanthorpe, Queensland (which actually ran out of water in early 2020) are perceived to be a drought risk.
Conclusion - keep your eye on climate change
As climate change continues to have an impact on the human population, there will be major changes in the real estate industry. This will include changes in the investor priorities, as well as tenant demand. There will also be changes in the way people assess the value of assets, and in how people approach the whole game of developing and operating real estate.
As we’ve explored above, global warming affects the property market in a range of ways. From increasing insurance and falling property prices to potentially higher interest rates for bank loans, the careful property investor should keep a close eye on environment trends.
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