‘Structural discount’: True impact of flood risk on property prices revealed

A first-of-its-kind report has uncovered the true impact of flood risk on property values, revealing a persistent value gap that grows over time and limits household wealth.

Homes at risk of flooding may be cheaper than comparable properties, but that discounted purchase price can hold buyers back for years into the future, a new report has found.

A typical three-bedroom house at risk of flooding could sell for $75,000 less than a comparable property without flood risk, according to the PropTrack Climate Council Property Value Flood Risk Report, released Wednesday.

But with values for at-risk homes growing slower, that value gap compounds over time and limits household wealth creation, the report found.

PropTrack senior economist and report co-author Eleanor Creagh said this amounted to a “climate disaster-related penalty”.

“While these homes may appear more affordable on face-value to buyers, the lower value reflects a risk of significant future costs like higher insurance premiums and property damages,” she said.

The report found there were more than two million flood-prone homes in Australia, more than 800,000 of which were located in Queensland, representing a third of all homes in the state.

About 70% of flood-prone homes experienced a reduction in value due to flood risk. These were disproportionately located in south-east Queensland and northern NSW.

For the remaining 30% of homes, flood risk was outweighed by the benefits of waterfront amenity and coastal views in buyer’s valuations, the report suggested.

“Flood risk may be under-priced in these markets with buyers unaware of the risk they face,” Ms Creagh said. “Or buyers’ amenity preferences may simply outstrip the perceived downside of flood risk.”

In premium markets such as Noosaville and Noosa heads on the Sunshine Coast and Hope Island on the Gold Coast, properties at risk of flooding were actually valued higher than comparable risk-free homes, the report noted.

Real estate agent Richardson & Wrench Noosa Heads director Shane McCauley said flood risk wasn’t on the radar for most buyers in the Noosa region, who were more focused on the benefits of the waterside position rather than potential drawbacks.

“When people are looking at properties in Noosa, they’re not considering it as a flood zone,” he said.

“Real estate is extremely popular and very finite, and the value is always increasing.”

The report combined PropTrack valuation data with historic hazard data from Geoscape to analyse the impacts of flood risk on individual residential property values.

It noted that at-risk properties can have a “structural, persistent discount at the property level”, with growth in prices over time not enough to erase the penalty associated with flood risk, and the value gap often widening.

“In regions where flood risk reduces property values, losses are entrenched in market pricing, compounding over time,” Ms Creagh said.

In the long-run, this resulted in a growing wealth gap between at-risk and flood-free households, the report found.

Recent flood events trigger greatest price impact 

The report found the largest value reductions were clustered in areas where damaging floods were still in recent memory, including Lismore, Hawkesbury, Ballina and south-east Queensland.

In Lismore, prices of at-risk and flood-free homes had diverged significantly since the city experienced its highest flood on record in 2022, when floodwaters rose 14.4 metres.

While home values in the broader Richmond-Tweed region have recovered since then, values of Lismore homes at risk of flooding remained more than 20% lower than at the start of 2022, took longer to sell and had greater levels of vendor discounting, the report found.

The findings suggested buyers were increasingly willing to pay more for homes in safer locations, and values of at-risk homes were more heavily reduced since the major flood event.

Climate Council research shows floods were the most damaging type of extreme weather event in Australia, accounting for about 29% of damage, followed by tropical cyclones (23%) and droughts (19%).

The report noted the role of climate change in the increased frequency of flood events, with higher temperatures leading to greater evaporation and higher moisture levels in the atmosphere, boosting the intensity of rainfall dumped on coastal areas.

Ms Creagh said the cumulative impact of more frequent extreme weather events could lead to a more sustained impact of flood risk on the property market. 

“Over time, this is likely to contribute to a split in the market, where climate-resilient properties are better positioned to retain long-term value,” she said.

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