The 2019/2020 bushfires – a game changer for Sydney’s property market

“What will global warming look like? Scientists point to Australia,” ran a headline in the Los Angeles Times in 2009.

 A decade later, the world is pointing to Australia – and much of the country is literally on fire.

 With Australia in the eye of the climate change storm of which these bushfires are a symptom, what does that mean for the property market in Sydney?

Is it the latest shock joining those Curtis Associates examined in April 2018?

Or should Sydney property buyers swallow upbeat media commentary and base their decision making on pre bushfire consumer surveys that ignore this elephant in the room?

In this CurtiseCall special report, Sydney buyers’ agent Curtis Associates shows why the answer to that question should be an emphatic “no” and how, through the mechanisms we discuss, these fires will inevitably have direct as well and indirect medium and longer term effects on the Sydney property market.

How bad are they?

Bad.

Australia is prone to bushfires, a natural cycle of destruction and regeneration. That said, the sheer ferocity and scale of the fires today are unprecedented even by world standards.

The death toll in NSW currently stands at 25 including three American fire fighters who just perished in a downed aircraft with fires so far having destroyed a record-breaking 4.9 million hectares of land in this State alone and climbing by the day despite a brief rainy respite. Nation wide, more than 1 billion animals have reportedly died and koalas as well as superb lyrebirds could be listed as endangered.

Smoke from these fires has now circled the globe.

Meanwhile, the New Year’s Eve catastrophe saw one of the largest peacetime evacuations in Australian history, with Prime Minister Scott Morrison calling in the Navy to rescue 4,000 stranded holidaymakers in Mallacoota in Victoria’s east.

What’s different about these fires?

Doctors Gergis and Cary of the Australian National University (ANU) explain in an article published in The Conversation on 14 January 2020:

“[S]everal factors make eastern Australia’s recent crisis different to infamous bushfires in the past.

First is the enormous geographic spread of this season’s fires, and second, the absence of El Niño conditions typically associated with previous severe fires.

Thirdly and most important, these fires were preceded by the hottest and dries conditions in Australian history.”

The country has had record droughts: bush fire seasons are starting earlier and ending later; rainfall has declined by roughly 20 percent in the southwest since the 1970s and  temperatures are soaring: the Bureau of Meteorology reported that Australia has just endured the hottest January to October period since records began in 1910.

Doctors Gergis and Cary conclude: 

“It will take time to understand the exact contribution of each climatic factor in the bushfire season of 2019–2020. However one thing is certain: unless there are global reductions in greenhouse gas emissions, temperatures will continue to rise, increasing the risk that catastrophic bushfire conditions become Australia’s “new normal.””

So far this season, apart from an incident in South Turramurra, the bushfires have not entered Sydney. The last time that happened with scale was in January 1994 when 101 houses were destroyed in Jannali and Como West, 13 in suburbs around Lane Cove National Park and 42 in suburbs around Ku-ring-gai Chase, Garigal and the Royal National Parks. 

Despite this, 2019-2020 fires have had a palpable impact on living standards across the most densely populated parts of Australia and not just where the fires themselves are burning. Hazy, smoky skies, face masks, brown rain and toxic, choking air became the new normal in Sydney, Melbourne and Canberra.

This graph from the NSW Department of Planning Industry and Environment shows just how unprecedented that smoke has been – in the last year Sydney experienced more bad quality air days than in the previous 10 years combined:

In Sydney, pollution levels have been rated as hazardous — often up to 22 times above levels considered safe (if there is any such thing). This has led to a jump in hospital admissions, with a 30 percent increase in people reporting to emergency wards across the country for heart and breathing problems in the first nine days of December, according to the Australasian College of Emergency Medicine.

For those with pre-existing conditions, such as asthma, bushfire smoke is especially bad news as tiny airborne PM 2.5 particles can damage lung tissue with the risks of diabetes, heart attacks and strokes increasing.

The Australian Medical Association Federal Council has said climate change is a “health emergency” that will “cause higher mortality and morbidity from heat stress.”

For Sydneysiders, another big difference between the bushfires of 1994 and these is the belief that anthropogenic climate change has caused or at least contributed to the latter.

That belief is widespread.

As reported in The Guardian on 23 January 2019, a survey by policy think tank the Australian Institute (AI) of more than 1,000 people found 57% of Australians were directly affected in some way by the fires over the past three months.

The article continued: “People who had been impacted by the fires were much more likely to be “very concerned” about climate change (58%) than those not impacted (32%). Those directly affected were also more likely (68%) to say Australia is experiencing “a lot” of climate change impacts, compared with those not affected (42%)…Tom Swann, senior researcher at the AI said the findings underscored the extent of the “vast” social, economic and medical impacts of Australia’s “national climate disaster.”

Similarly, Deloitte recently surveyed 2000 executives from companies with revenues of between $500 million and $10 billion a year across 19 countries, including 150 Australians. Up to 89 per cent of the 150 Australian executives surveyed viewed climate change and environmental sustainability as the “societal issue of greatest focus,” compared to 54 per cent world-wide.

The Government’s response so far has made Australia a pariah on the world stage

As important is Australia’s now damaged perception on the world stage.

Australia is ranked the worst of 57 countries on its climate policy. As reported in the Sydney Morning Herald (SMH) on 24 January 2019 “[t]he country is the world’s largest exporter of coking coal used to make steel, the second-largest exporter of thermal coal burnt in power stations and, since last year, the biggest gas exporter.”

Yet, despite the fires, Scott Morrison continues to give the go-ahead on controversial projects such as the controversial Adani Coal Mine and has been widely criticized for his inept handling of the crisis (this is, after all, the man who brought a lump of coal into parliament) while the Labor Opposition keeps dithering.

Although Australia only accounts for 0.3 per cent of the world population, it releases 1.3 per cent of global greenhouse gases, has one of highest emissions of carbon dioxide per capita in the world and its performance with rising emissions since 2005 has been the worst of all but seven OECD nations. 

In December, Tourism Australia released a much anticipated $15 million advertisement starring Kylie Minogue. The advert’ has now been pulled. But not before commentators noticed the stark difference between the “fantasy” of Australia plugged abroad and the new reality for those living the ground.

Just last week, supermarket giant Kaufland suddenly abandoned well developed plans to open in Australia leading some to speculate that the bushfires might have influenced its decision.

Across the globe, Australia is no longer viewed as a worry-free haven and a place of natural wonder, but as a catastrophic early marker of the effects of climate change – the metaphoric canary in the coalmine.

“It doesn’t matter if you’re affected by the fires or not — if you’re in Australia, according to the rest of the world, it could mean you’re on fire,” Dr Gabby Walters, an associate professor at the University of Queensland (UOQ), told the ABC earlier this month.

That celebrities – from Cate Blanchett to Russell Crowe to Pink – are also drawing the world’s attention to Australia has only compounded its now confirmed reputation as a climate laggard on the international stage.

Sure, but why does this matter for property in Sydney?

Sydney is a city in a basin where extensive bushland abuts many urban fringes. As such, there are likely to be many effects of these bushfires both in the short and longer terms.

We first discuss first some of the tangible, direct effects.

• Downwards pressure on residential, commercial and industrial property prices as a result of the smoke

Sydney is appealing for property investors from Asia, and particularly China, for its clean air – a key reason why international students flock here, as buyers’ agent Curtis Associates reported in its last Curtise Call special report, published in October 2019.

Yet, given the health risks associated with smoke pollution, will Sydney continue to be a go-to destination? Chinese buyers looking for better lifestyles will be wary about immigrating or buying in Sydney, as will buyers from Hong Kong, who might want to flee the protests and China’s increasing authoritarian hand, and the UK, who might want to flee the fall out over Brexit.

Dr Richard Denniss, chief economist and former executive director of policy at the AI , tells Curtis Associates that “attracting great staff from around the world is key to building global businesses. If Australian cities become known as smoky, hot and dangerous places to live then attracting talent and investment will get a lot harder. This summer has done nothing to attract people to Australia and inevitably has discouraged many from visiting or moving here. The driving force behind Sydney’s house prices is population growth and low interest rates. It’s unlikely the bushfires will have a major impact on house prices in the short term, but if smoke and flames discourage people from moving to our cities then that will obviously have a downward impact on house prices.”

Global real estate investment management firm Heitman has declared that both Sydney and Melbourne have fallen in worldwide prime real estate market rankings, with Sydney dropping to the 10th spot and Melbourne to the 19th.  

The bushfires, rising sea levels, issues around insurance and the government’s refusal to address climate change all contribute to Sydney’s increasingly tarnished reputation as a place to buy property. Indeed, this year’s ranking looked in particular at how cities were adapting – or not adapting – to climate change.

“The resilience of cities like Melbourne and Sydney and Brisbane and climate-related risks are increasingly top of mind,” John White, Heitman’s senior managing director of public real estate securities, told the Australian Financial Review (AFR).

• Downwards pressure on residential, commercial and industrial property prices in high risk bushfire areas

In its paper entitled “Counting bushfire-prone addresses in the Greater Sydney Region, Risk Frontiers,” the Natural Hazards Research Centre at Macquarie University identified the separation distance between an address (whether residential, commercial or industrial) and bushland as a crucial factor in determining the risk of  property asset destruction by bushfire – the closer the bush, the higher the risk.

Having analysed all addresses, the Centre concluded that the percentages of them within 130 m of bush land in three main Sydney metropolitan regions were as follows:

That is more than 100,000 residential and commercial properties at high risk of being destroyed by bushfire.

The Centre also found that Ku-ring-gai and Hornsby were the two Local Government Areas close to Sydney CBD to have more than 30% of high-risk addresses.

In addition to reduced demand for residential and commercial property in these high risk areas, higher insurance premiums as well as likely new restrictive planning regulations will almost inevitably add to downward price pressure.

One example of the latter may be a requirement to build bunkers in the backyard – which Clive Williams, a visiting professor at the Centre for Military and Security Law at the ANU, tells Curtis Associates could save lives.

Such a requirement would be a species of what central bankers call a “transition risk” as buyers and investors write down the value of such assets until they become “stranded” or “distressed.”

Adding to these downward price pressures is the idea of “managed retreat”.

In The Atlantic, Catherine Ryland, an urban planner and a bushfire-resilience expert, suggested that homeowners from areas that are as yet unaffected, but still high-risk, might want to relocate before it is too late.

Some of these could move to the more inner-city areas of Sydney.

• Tangible direct costs adding to affordability pressures

    According to Dr Denniss: “The financial cost of fighting the fires, repairing the damage caused by fires and preparing for next years fires will be primarily faced by the NSW state government…[a]nd most New South Wales taxpayers live in Sydney.”

We do not yet know the full extent of what economic toll these bushfires will have on the economy, but history provides some sobering lessons.

The 2009 Black Saturday bushfires had tangible costs estimated to be AUD$3.1 billion and intangible costs estimated to be AUD$3.9 billion, according to a Deloitte Access Economics report published in 2016.

“While it’s impossible to say for certain exactly how big the cost of the bushfires to people in Sydney is, it’s easy to say that they are very substantial,” says Dr Denniss.

• Downward pressure on property prices caused by property insurance premiums going through the roof

Sydney property owners and buyers can expect their property insurance costs to rise substantially, particularly in areas where there is a high bushfire risk – a critical factor to consider when buying a property. Dr. Denniss says such rises are “inevitable.”

And even in areas where there is no direct bushfire risk, insurers are increasing their premiums or making blanket embargos. An anecdotal hint of what and how quickly this can happen has already arisen in Bowral in the Southern Highlands, New South Wales. The AFR reported that many insurers had a “postcode embargo” for the area, including in the town centre – an area no bushfire can reach.  

This has already had an effect on the property market. “Sellers feel frightened to sell, buyers are frightened to buy – and even if they want to buy, there’s this extra hurdle … we are hoping things settle down quickly,” Bowral property agent Sandie Dunne told the AFR .

As reported in the SMH on 30 December 2019 and elsewhere: The Reserve Bank of Australia’s (RBA) half-yearly review of financial stability published in October 2019… “said the crucial insurance sector is most directly exposed to the physical impacts of climate change. It pointed out that insurance claims for natural disasters in the current decade have been more than double those in the previous decade, after adjusting for inflation, and that is “likely to grow over time.”

The RBA warned that climate change will expose more assets owned by households and businesses to increased physical risk such as property located in bushfire-prone or coastal areas.

But the challenge of accurately pricing that risk will create an economy-wide dilemma.

“If insurers under-price these risks, it could threaten their viability in the event of extreme weather events resulting in very large losses,” the report said.

“On the other hand, over-pricing would impede the risk pooling function provided by insurance and unduly limit economic activity.”

The report even canvassed the possibility that businesses and households could lose access to insurance altogether in some cases.

“Even if correctly priced, more of these risks may become uninsurable, forcing households, businesses or governments to bear this risk,” it said.

A number of other economic analysts think climate change will eventually render many properties too expensive to insure, although the shift could play out over some decades.

A report released this month by the AI said a large number of Australian properties will likely become uninsurable due to the effects of climate change. And that will, in turn, affect property values.

“There are frightening projections about increased frequency of natural disasters and it seems likely that many properties will become prohibitively expensive to insure, or insurance won’t be offered,” said report’s author, Mark Ogge.

A host of perverse economic incentives for property holders would result, says Ogge. It may even require an expensive “managed retreat” from some inhabited areas [as discussed above].” 

• Saving the biggest for last – the risk climate change poses to domestic interest rates

As previously discussed, one of two key drivers of property prices is low interest rates. Central to those rates is Australia’s precious AAA credit rating.

The lower that rating, the higher domestic interest rates.

To quote John Quiggin, Professor, School of Economics, UOQ as published in The Conversation on 16 January 2020:

“The announcement by BlackRock…that it will dump more than half a billion dollars in thermal coal shares from all of its actively managed portfolios, might not seem like big news…Virtually all the major Australian and European banks and insurers, and many other global institutions have already announced such policies…

[This] announcement matters, in part because of Blackrock’s sheer size. It is the world’s largest investor, with a total of $US7 trillion in funds under its control…

Blackrock chief executive Laurence Fink noted that climate change has become the top issue raised by clients. He said it would soon affect all investments including home mortgages.

Once investors start assessing government bonds in terms of climate change, Australia’s government will be in serious trouble.

The bushfire catastrophe and the government’s inadequate response have shown the world Australia is both among the countries most exposed to climate catastrophe and one of the worst in terms of contributions to solutions.

Once bond investors follow the lead of Blackrock and other financial institutions, divestment of Australian government bonds will follow.

This process has already started, with the decision of Sweden’s central bank to unload its holdings of Australian government bonds.

Taken in isolation, Sweden’s move had virtually no effect on Australia’s bond prices and yields. But the most striking feature of the divestment movement so far is the speed with which it has grown from symbolic gestures to a severe constraint on funding for the firms it touches.

Once there is a serious threat of large-scale divestment in Australian bonds, the agencies will be obliged to take this into account in setting Australia’s credit rating.

The much-prized AAA rating is likely to be an early casualty.

That would mean higher interest rates for Australian government bonds which would flow through the entire economy, including the home mortgage rates mentioned in the Blackrock statement.”

So what can be done?

“If the federal government was interested in avoiding the three degrees of warming that we are currently in track for they could invest more heavily in renewable energy, batteries, public transport and energy efficiency,” says Dr Denniss. “They could stop approving new coal mines and gas wells. They could introduce a levy on carbon pollution, or on fossil fuel production, and use the proceeds to fund the transition and preparations we need to make. Or they could keep telling themselves what a great job they are doing and blame environmentalists for the bushfires.”

If action isn’t taken, then extreme weather is likely to continue.

Choices have consequences

As Dr Denniss, puts it: “If economics teaches us anything, it is that choices have consequences. People such as myself have failed spectacularly to convince the Coalition that prevention is cheaper than cure.” 

Putting those consequences in perspective – the sheer size and national significance of Sydney’s property market

According to Roy Morgan Wealth Report 2^nd edition released in August 2019:

“The average net wealth [personal assets minus debt] of Sydneysiders in the year to March 2019 was $570K making it the clear leader from second placed Melbourne ($491K)…[reflecting growth rates since the GFC and having]… a lot to do with real estate prices where Sydney and Melbourne have generally shown the greatest increases. Evidence for the impact of this is that there is a much higher proportion of personal wealth in NSW held in owner occupied homes (52.9%) compared to some other lower value States”…

Conclusion

If, as Sydney property buyer, you believe as we and all central bankers do, that a causal connection exists between climate change and the 2019/2020 bushfires, then it is clear from the impact of those fires as discussed in this article that tackling climate change is essential to preserving both Sydney’s appeal as an investment destination and the value of its residential and commercial properties.

In deciding whether there are more votes to be won or lost with an ‘adapt and mitigate’ band aid, this federal Coalition Government would do well to reflect on the sheer size of Sydney’s property market and its relative importance to the household and business balance sheets of both local and foreign property owners and buyers.