La Niña Flooding the Market - Wild Weather in the Property Sector
La Niña Flooding the Market - Wild Weather in the Property Sector
(3 Minute Read)
When La Niña moves into the third year, it is called a 'triple dip'. The triple dip La Niña is drastically affecting the Australian building and housing industries. In the last two years, we've seen an increase in flooding and severe weather conditions across the country. As the population continues to grow, this has led to a surge in demand for new homes, renovations, and rental properties as people look for ways to protect themselves from further lousy weather.
Unfortunately, it's not over yet. The Bureau of Meteorology's (BOM) announcement of a continued La Niña weather pattern has predicted a third year of wet weather through spring and the lead into summer. This has, in turn, garnered a response from the Insurance Council of Australia (ICA), which has encouraged Australians to prepare for further extreme weather trends in Eastern Australia.
What does this mean for the housing market and building industry in the coming months?
Insurers trying to plug the holes
With more extreme weather on the horizon, insurers are preparing for an influx of claims related to floods, storms, and other natural disasters. And unfortunately, it's not just homes and businesses at risk. With our infrastructure in coastal areas, roads, bridges, and power lines are also vulnerable to severe weather conditions. Unfortunately, this means that the repair and replacement costs associated with damage to these assets could be extremely high.
In an effort to try and offset some of these costs, insurers have been increasingly turning to data and analytics to help them better understand risk. This information is then used to help set premiums and decide which areas are too risky to cover. For example, in the aftermath of Tropical Cyclone Yasi in 2011, insurers used data to assess the impact of storm surges on properties in north Queensland. This helped them to identify which areas were most at risk and adjust their premiums accordingly.
However, it's not just about setting premiums. Insurers also use data to improve their claims processes and assess customer needs. For instance, by understanding what customers need after a major weather event, insurers can provide targeted support that helps them get back on their feet as quickly as possible.
The ICA has also been working with the government to try and mitigate the impact of extreme weather events. For example, they've been advocating for reforms to the National Flood Insurance Scheme (NFIS) which would make it easier for people to access affordable cover.
They've also been calling for an overhaul of Australia's natural disaster relief funding. Currently, most of the costs associated with natural disasters are borne by taxpayers through things like the Disaster Recovery Funding Arrangements (DRFA). The ICA believes this is unfair and that insurers should be allowed to pass on some of the costs to customers through higher premiums.
Understanding the insurer's side of things gives us great insight into the way investors respond to the varying market and the natural factors that influence it.
The Bill on Paper
The ICA has released a report that details the overwhelming damages caused by La Nina in 2021 and 2022. The combined insurance damage bill came to AUD$5.92 billion, with more than 296,000 claims filed. As if this news wasn't enough already - according to an analysis commissioned just last month on behalf of (ICA), we can expect extreme weather events to cost us around $35.24 billion in 2022, equating to $888 per average family annually. At this rate, it's predicted to be closer to $2,500 by 2050.
Supplies, Sole Traders, and Shortages
The building industry has already suffered supply chain disruptions with the pandemic. Next to that, Australia now has skilled labour shortages despite the record low unemployment rates. Adding insult to injury, costs of material and logistics are skyrocketing. The addition of extreme weather events is only furthering the struggling northeastern development sectors.
As the rental market experiences a rapid recovery and increase from the pandemic, and now with the flood damage, supply begins to dwindle. The building industry can't service the growth with the continued interference from natural causes. With this in mind, predictions surmise that the building material and service prices will remain at decade highs, extending as far as late 2023. This means the already competitive rental market will remain as such, with demand retaining and only increasing; the media has dubbed it a rental crisis in the Australian rental market, with prices rising as much as 40% and beyond.
The triple dip is foreboding and is leaving the vast majority of Eastern Australia on high alert as the wet season is soon to set in. The property market is bustling, as expected, post the pandemic. However, now that trends are forming and the market is correcting, the addition of a third horrific wet season leaves the building industry in a bind. Though it isn't all doom and gloom as development remains full steam ahead, adding these hurdles and setbacks creates an expensive environment for supply to meet demand. PRD Penrith is invested in ensuring investors are aware of the shifts in the property market and the investing environment. Stay informed with PRD Penrith, and get in contact with our residential or commercial teams to discuss further the future of the property market with the looming weather threats.
