How will Australia’s bushfire crisis affect property and lending?

The bushfires that have been raging in Australia since September have so far destroyed over 11 million hectares of land, including more than 3,000 homes across NSW, Victoria, Queensland, South Australia and the ACT. The human death toll stands at 29 and is potentially in the billions for livestock and wildlife.¹

Financial support for those affected has been unprecedented in terms of Australian disasters, with the total from donations now around $535 million – from individuals and businesses both here and overseas.²

But the fallout from the 2019/2020 bushfires is going to affect many Australian industries too, and therefore all Australians, both directly and indirectly. Here, we will take a closer look at the property and lending industries, to determine what we can expect in the short and long term.

Property

The rally in property prices and listings in many areas during the second half of 2019 has been subdued by the bushfire crisis, particularly in regional areas of Victoria and NSW. It seems very likely that areas affected by the bushfires over summer will experience lower property prices for up to 12 months at least.

Ratings agency Standard and Poors (S&P) believes the fires are likely to put downwards pressure on property prices in affected areas because these areas could be viewed as less desirable or ‘high-risk’.

Louis Christopher, Managing Director at SQM Research, agrees, saying it is likely that property markets in bushfire-affected areas will see both a decline in listings and values in the short term.

According to REA’s chief economist, Nerida Conisbee, there are a number of identifiable trends that tend to occur after a major bushfire event:

1.  Data shows median house prices tend to decrease in suburbs and regions immediately following a significant bushfire.
2.  Property ‘views’ (that is, by potential buyers searching property listing sites) in affected areas tend to decrease initially, but increase again after time.
3.  There is often an increase in listings of properties after a major bushfire, possibly as people look to leave the area, contributing to the decrease in sales prices.

While it makes sense that people may want to leave an area if their home is destroyed by bushfire, so far this time around, listings have generally remained low. Some vendors in nearby regions have pulled their properties off the market, fearing they will not get the price they want. There is also a

sentiment among some sellers of not wanting to capitalise on the crisis. It may be that listings will increase as the recovery progresses and people reassess their future.

Conisbee says over the long term, house prices in bushfire-devastated areas actually tend to increase faster than in the broader region. Prices in affected areas come back in line with the broader market once the region recovers, but properties are typically rebuilt so more stock in the area is new and of better quality, and this increases property values. The new properties may also have more modern fire-protection measures built into them, making them even more valuable.

Renters in affected areas are likely to be affected by low supply and potentially higher rental prices if investors decide to capitalise on low vacancies. There is currently a major shortfall in rental properties, with so many homeowners unable to inhabit their own properties. Regional Victoria in particular is facing very low supply, with a number of areas experiencing vacancy rates below two per cent, and some even below one per cent.

Lending

The bushfire crisis is likely to affect lenders, and possibly borrowers as well.

Banks are expected to start facing a higher-than-normal number of claims for financial hardship as people struggle to make ends meet in the wake of the destruction. Those who rely on income from tourism or agriculture in particular could be more severely affected and require more leniency.

S&P says it is probable that local employment will be negatively impacted. If people lose their jobs, they may struggle to service their debts and banks can expect elevated mortgage arrears, potentially for quite some time until customers get back on their feet.

According to investment banking firm Morgan Stanley, banks will have to set aside higher provisions as fire-affected customers, including small businesses, face cash flow problems. Banks will need to give these customers more time to repay loans, and accept some losses on these loans.

Morgan Stanley predicts the banking sector will face lower earnings of between one and two per cent (about $270 million to $540 million) this financial year, as a result of the bushfires. Many banks have pledged contributions to bushfire recovery, increasing their outgoings further.

The investment bank has also flagged ‘second-order effects’ from the fires, including interest rate cuts. If the fires put sufficient strain on our economy, the Reserve Bank may need to reduce official interest rates again. This will exacerbate the contraction in bank net interest margins, since banks can no longer offset the lower rates on loans by lowering their deposit rates – these are already almost zero.

We have already seen bank reluctance to pass on interest rate cuts due to lower margins throughout 2019. The fires will exacerbate this issue and may mean banks cannot pass on as much of any further cuts to borrowers as they otherwise could have.

So, while those not directly affected by the fires should feel eternally grateful, we can nevertheless expect to see broader flow-on effects for the foreseeable future.

SOURCES: ¹https://www.dailytelegraph.com.au/bushfiresupport/fathers-son-newlyweds-21-lives-lost-to-nsws-deadly-bushfires/news-story/0ba931abc7ce3f1bac820429873b75c2, ²https://www.dailytelegraph.com.au/news/nsw/nsw-bushfires-donations-tidal-wave-hits-535m/news-story/6186a100b2f5ea878913df013d59604e