Australia’s property market has proved it can weather natural disasters as devastating as 2017’s Cyclone Debbie. But what would happen as cyclones move further south in climate change scenarios? And what does that mean for homeowners, bankers and insurers?

As another cyclone season gets underway, memories of Cyclone Debbie are still fresh in the minds of thousands of Queenslanders and the Queensland tourism industry. The Category 4 severe tropical cyclone with its 270km/h peak gust winds left a trail of destruction across the Whitsunday Islands, Airlie Beach, Proserpine, Bowen and Collinsville in March 2017.

Unlike other tropical weather events, Debbie wreaked havoc beyond gale-force winds. Just as Australians started to comprehend the extent of the initial damage, large areas of Queensland were struck by sudden and severe floods that followed in the cyclone’s wake.

Over 40,000 homes were damaged or destroyed, and tragically, 14 people died. It was the second costliest cyclone in Australia’s history, with an insured damage bill of around $1.74 billion. Of the total recorded losses, an estimated 70 per cent of costs were directly attributable to the cyclone itself, while 30 per cent were from subsequent flooding events.

Aggregate losses associated with Cyclone Debbie in 2017. Proportion of wind dominated losses (red) and by flood (blue) – Source: CoreLogic / PERILS 2018

Cyclone Debbie, and other severe weather events in recent years, are changing the way Australian people and businesses view natural disasters. Homeowners are still building and buying properties in cyclone-prone locations, but with a renewed focus on disaster preparedness. Insurers are reviewing their coverage policies to support what is likely to be a growing volume of customers affected by natural disasters into the future. Banks are similarly assessing their risk appetite for high-risk areas over the coming decades. 

How do natural disasters like Cyclone Debbie affect the property market?

Outside of Australia, the property market tends to be a casualty of natural disasters. As we saw after the aftermath of Hurricane Katrina in New Orleans back in 2005 or more recently in 2017 when three major hurricanes affected Texas and Florida, widespread destruction typically disrupted economic activity and affected people’s capacity to borrow money or repay debts, and often led to an increase in mortgage delinquencies. These effects can have long-term impact on buyer activity and property values.

However, Cyclone Debbie bucked this global trend. In fact, Queensland’s property market showed an enduring resilience. In its immediate aftermath, ‘for sale’ listings plummeted due to a loss of housing supply. While this was initially associated with a price dip, sales volumes were on the rebound within six months. And while the volume of listings is still lower than average across some affected parts of Queensland, properties spend a shorter time on the market.

For renters, the same effects of reduced housing supply increased pressure on the market and drove up rental prices.

CoreLogic Market Trends data at Postcode level, for impacted postcodes vs rest of QLD regional GCCSA. % change from January 2017

The Queensland property market continues to perform strongly in cyclone-affected areas. It may seem counterintuitive that overall median sales prices and rental prices appeared to start correcting within six to nine months. However, CoreLogic research indicates that this has been a consistent trend, with similar market behaviour observed after Cyclone Yasi.

Although Australian housing conditions have remained diverse and cyclical, housing values have generally shown a strong upwards trend over the past thirty years. Natural disasters like cyclones and bushfires have had serious but short-term impacts, and these catastrophes generally haven’t stood in the way of a market rebound.

That many of Australia’s natural disasters have struck in areas with relatively low population density (i.e. the Whitsundays as opposed to Brisbane or the Gold Coast) may be its saving grace in this regard. The financial and economic impacts of natural disasters increase significantly with population density. The 2003 Canberra Bushfires, for example, had a longer-term impact on sales and listings activity than other recent bushfires, in part because the damage mostly occurred in urban areas. 

Canberra was the only property market analysed where sales activity was noticeably reactive to the bushfire event. Sales activity from most affected Statistical Areas SA2 (e.g. Duffy) before and after the occurrence of the bushfires marked by the dashline (T0).  

What’s coming for cyclone season 2020/21 and beyond

Climate change research suggests that – while the frequency might not increase - we can expect to see stronger cyclones like Cyclone Debbie move further south. For Queensland this means to densely populated areas like the Sunshine Coast, Brisbane and the Gold Coast.

With the sheer volume of people and properties that would be affected, it would be reasonable to assume that a rapid economic or property market recovery may not necessarily follow. This presents new risks for banking and insurance companies, whose business models depend on an accurate understanding of how natural disasters affect residential property values. 

For homeowners, investors, holidaymakers, bankers and insurers alike, preparedness for natural disasters will remain a critical defence. In the immediate term, Australians will continue to be affected by natural disasters with potentially catastrophic effects. Understanding the risk profile for your area and taking appropriate precautions is a must heading into cyclone season 2020/21.

Climate change is expected to have serious ongoing impacts on business. More properties and businesses will likely be susceptible to damage associated with natural disasters, and the magnitude of impact is expected to increase. Building vulnerability and construction standards also need to be reviewed and updated to reflect evolving climate risks.

Where to from here?

Cyclone Debbie showed that natural disasters appear to be impacting a wider area, with an increasing number of insured losses. It reinforced that climate change is expected to be a major source of financial risk over the long term, and puts pressure on the finance sector to articulate how future climate change will affect business. It also serves as a reminder to invest now in data and research to create useful models, and assess potential losses and the impact on their portfolios.

It’s also one reason why CoreLogic, one of the world’s leading providers of property data and analytics, has partnered with global reinsurer and risk modelling specialist Munich Re to prepare for future climate risks. Our catastrophe event insights, which provide detailed intelligence on structural risks and natural hazards, are targeted towards helping sharpen risk assessments and property valuation, and assisting Australians prepare for our changing natural disaster landscape.

Dr Pierre Wiart is head of consulting and risk management Australasia at CoreLogic.

For interviews or more information contact [email protected].