Disasters happen to people
The recent Cyclone Debbie was a disaster. People were hurt and killed. The psychological impact is, and will be, dreadful.
I’m not going to talk about the human impact - only the economics. I could not do justice to the people involved. I’d suggest a visit to the Red Cross or similar organisation to help those impacted.
Disasters are “News”
The Cyclone Debbie disaster, naturally, made news worldwide (BBC, CNN, Guardian, NY Times) and of course real estate prices started getting discussed.
What always surprises me, when it shouldn’t, is that there is so little content and so much hot air (AKA signal-to-noise ratio) in real estate discussions. When I was working at Hometrack I presented on real estate recovering from disasters at the ARCRC conference in 2011.
Historically what happens?
Rather than postulating wildly, I picked three recent disasters in Australia and reviewed what happening with prices and sales volumes.
In the charts that follow, I’ve normalised both the sales price index and the sales volume index so that they are 1 at the date of the disaster. That way we can easily see how much the market has moved.
1989 – Newcastle Earthquake
The 1989 Newcastle Earthquake was “one of Australia’s most serious natural disasters”.
Quoting Wikipedia:
The damage bill has been estimated at A$4 billion (including an insured loss of about $1 billion).
The effects were felt over an area of around 200,000 square kilometres (77,000 sq mi) in the state of New South Wales, with isolated reports of movement in areas up to 800 kilometres (500 mi) from Newcastle. Damage to buildings and facilities was reported over an area of 9,000 km2 (3,500 sq mi).
What happened to the market?
Sales Volumes
The market dropped December 1989 – January 1990, but I wouldn’t conclude much from that. Sales volumes generally fall over the New Year period. Some of it would definitely be a result of the earthquake, but then the market starts improving.
However, look at how much the sales volumes fell from August 1988. There was something happening in the market prior to the earthquake.
Price indices
Units - The market didn’t fall. It actually went UP after the earthquake, but longer term the market flattened.
Houses - The long term trend is up, up, up!
2009 – Black Saturday bushfires
The 2009 Black Saturday bushfires was the worst bushfire disaster that Australia has experienced.
More than 3,500 buildings were destroyed — 2,029 houses were among them. The burned area was 450,000 hectares (1,100,000 acres).
What happened to the market?
Here I just looked at a part of state — Kinglake, Murrindindi and Marysville. It was the largest of the many fires burning on Black Saturday, destroying more than 330,000 ha (820,000 acres). It was also the most destructive, with over 1,800 houses destroyed and 159 lives lost in the region. (Wikipedia)
Sales Volumes
This may, at first glance, be a surprising result - they’re up. It definitely appears that the long(er)-term average sales volume is higher after the disaster than before.
However, sales volumes without a view as to the prices (i.e. the index) can be misleading.
Price indices
Units - It doesn’t appear that there was much impact in the prices of units.
Houses - House prices, however, had a dramatic fall - so after the fire disaster there were more houses (increased sales volume) selling for less (decreased price index). If you were in the sensationalist media you would print a headline like:
Homeowners losing money as they flee disaster region!
…but again this would be wrong. Yes, there is a fall in housing prices and yes, sales have increased, but the trend in house prices was falling well before the fires. Looking at the index (and remember that values in indices are relative!) the price index fell from 1.1 to 1 from October 2008 to November 2008. That is a 9% fall in value in one month. The index looks to have fallen from 1 to 0.95 in the month after the disaster - that’s (only!) a 5% fall. What’s been happening in the market? From the peak of 1.4 in September 2008 housing prices had fallen almost 29% before the disaster!
Squinting at the chart (the very best way to do robust analytics!) I’d say, you’d be hard pressed to claim this bushfire disaster had a broad impact in the housing market.
2010 – 2011 – Queensland floods
Again, quoting Wikipedia:
A series of floods hit Queensland, Australia, beginning in December 2010. The floods forced the evacuation of thousands of people from towns and cities. At least 90 towns and over 200,000 people were affected. Damage initially was estimated at around A$1 billion before it was raised to $2.38 billion. The estimated reduction in Australia’s GDP is about A$40 billion.
During the flooding it was reported that more than three-quarters of Queensland was affected by flooding.
How much of the state was impacted?
At the time, I worked out, based simply on postcode, how many properties were in the impacted regions and their market value.
I found that 1.1 million properties were impacted - depending on who you ask (and that is another upcoming post!) there are around 10 million residential properties in Australia, so almost 10% of the country’s residences were in postcodes impacted by this disaster.
I also found that the total market value of the impacted postcodes was $490B. The market value of all Australian residential properties was $5.9T in 2015, so 2011 would have been somewhere around $5B… We again see that around 10% of the country’s residential property value was impacted.
What happened to the market?
Good question! Let’s look at the Brisbane Local Government Area (LGA).
Sales Volumes
Sales volumes were already trending down. I’d suggest that sales volumes started falling mid-2009, but from Oct-2010 the fall in sales accelerated. Remember, the disaster was in December, so this fall preceded the flooding.
The volume of sales in January had more than halved, compared the two months prior. So the almost halving post disaster is hard to assign to either the disaster, or the prevailing economy.
Price indices
This is again interesting. After showing ~6% growth in the year 2009, the market for both houses and units flattened off. Corresponding, unsurprisingly, to the drop off in sales. Post disaster, prices dropped slightly, but nothing out of trend. So, it looks like there wasn’t a significant impact on property prices. The prices in the market seem to reflect the economy prior to the disaster. Of course, I’d like a longer time series to verify… Any love (and data) coming from Hometrack?
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Hypothesis
In this particular case I’d offer a reason why the market impact was limited.
This image was created by one of the awesome members of my team at Hometrack. Each blue dot shows a property that reported damage because of the floods. Feel free to stare with awe at the rows of properties and streets appearing as if by magic.
Now that you’re back reading this, what else do you see? Not all properties (even in a suburb) were impacted. More importantly, for someone buying a house in the unaffected areas - your new house survived the worst that nature could throw at it. Makes the surviving properties attractive doesn’t it?
Why aren’t real estate prices impacted?
This is the core question and conclusion from this work - and the answer is that I don’t know. It’s a question I’ll leave to Economists to post-justify a result.
I have some thoughts around the market returning to normal:
- People have short memories.
- Governments throw money at disaster recovery and reconstruction so the physical impacts are mitigated quickly.
- Insurance companies get a lot of pressure to resolve claims quickly — conversely there are lots of news articles to the contrary.
- Perhaps some disasters are not particularly disastrous to property?
Do you have a hypothesis? Tell me!