In the Australian context, the residential housing sector constituted about a third of the national GDP in the four quarters to September 2021 (Bleby, 2022).

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Thus, the resilience of residential housing markets can be considered to be a major factor affecting urban and regional resilience. We define housing market resilience as one where there is an initial dampened negative response of the housing market to disasters and subsequent faster and stronger recovery. Despite numerous natural disasters Australian housing markets remain resilient over time (Bullock and Orsmond, 2019).

We investigate the factors driving this housing market resilience despite the four major types of natural disasters recurrently affecting Australia: bushfires, cyclones, floods, and storms, between 2008 and 2021. This study maps the impact of natural disasters on housing market resilience and market liquidity and the role of ethnic diversity in reducing the impact of such natural disasters on housing markets. Our results will be of interest to the entire real estate industry, investors, financial institutions, governments and academics alike.

Natural disasters and housing market resilience

The data from the Department of Home Affairs, Federal Government of Australia demonstrates that there is an increase in the total number of natural disasters by about 17.2% between 2008 and 2021, the commonest being storms and floods. Despite this increase in natural disasters over the study period, house prices in Australia did not demonstrate any long-term impact of these disasters. Of the four types of natural disasters studied, floods affected the largest geographic area; bushfires on average lasted the longest at about 26 days. Bushfires tend to occur in isolation whereas cyclones, storms and floods often occur sequentially or concurrently. Our evaluation of natural disasters found that bushfires had a more significant impact on the livelihood and housing markets in affected LGAs given the higher intensity, in terms of scope and duration.

Bushfires did not have any correlation with year on year (YoY) house price growth. However, bushfires increased the average number of days of houses on the market and turnover rate. The occurrence of a bushfire postponed the sale of properties in affected LGAs. On the contrary, cyclones reduced property turnover rates. Storms while not affecting housing markets per se did increase the average days on the market and reduced turnover. Floods reduced the YoY house price, reduced housing market liquidity by increasing number of days on the market.

We analysed 4 major disasters as case studies, assessed as those with the largest number of LGA’s affected: 1.NSW Bushfires: 31 August 2019 (50) 2. Tropical Cyclone Oswald: 21-29 January 2013 (44) 3. NSW Flood: 15 January 2020 (84) 4.         Western Australia Tornado and Severe Storm: 7-13 June 2012 (87). Reviewing the impact of each disaster on housing markets in turn we make the following observations.

The 2019 NSW bushfire caused a rapid drop in housing markets in metro areas, with little or no impact in regional areas. Housing markets returned to pre-bushfire levels in metro LGAs in about 3 quarters. There was a transient increase in the number of days on the market accompanied with a dip in the average turnover in metro LGAs, returning to pre disaster levels in less than 2 quarters. However, at the same time, regional LGAs experienced increasing average days on the market, following the pre disaster trajectory, and a reduction in turnover that persists 3 quarters post disaster.

Cyclone Oswald 2013 did not impact housing markets, days on market or turnover in affected metro LGAs. On the other hand, in regional LGAs there was sudden dip in house prices at the time of the disaster, with an instant rebound in less than 3 months followed by a reduction in housing market, turnover and increase in days on market over the next two quarters.

The 2020 NSW floods did not impact on metro LGA house prices, on the contrary decreasing the average number of days on the market but increasing turnover. Even though floods did not reduce regional LGA house prices, housing liquidity was negatively impacted by floods with increased average days on market and a transient reduction in turnover over the next two quarters.

The 2012 storm did not reduce house prices in either metro or regional LGAs, nor affect liquidity in the form of turnover or days on market.

Using a complete database on natural disasters and a multivariate analysis throughout the country we find that for bushfire house prices remained almost unchanged in the first quarter after disaster but 4.7% higher in the second quarter. The momentum is maintained in the third quarter. A similar pattern is found in the case of floods and storms. House prices during the first quarter after the flood is 2.4% higher than the ending month of flood. In following two quarters, the upward trend in house price is maintained and the growth reaches 4.6%. For storms, the first quarter after the disaster records 4.8% increase in house prices. On the other hand, following cyclones house prices do not recover even after three quarters. Metro LGAs recover faster than regional LGAs for each disaster.

Meanwhile, housing market liquidity, measured by natural logarithm of number of days on market, deteriorates after the occurrence of cyclone, flood, and storm, but is generally unchanged in the case of bushfire.

For bushfires, both metropolitan and regional subsamples exhibit the same pattern as the whole sample, that is, the house price recovered resiliently in the second and third quarter after the bushfire, while the market liquidity was intact. But the results of other disasters show divergence between metropolitan and regional areas.

Overall, we find that housing markets’ reaction to natural disasters are divergent between metropolitan and regional LGAs, with metropolitan LGAs showing more resilience than in regional LGAs for bushfires and floods. This may be due to the increased vegetation in regional LGAs susceptible to more severe impact from bushfires; and metropolitan LGAs benefitting from better infrastructure to cope with all disasters; and that small regional economies are more negatively impacted than larger metropolitan economies by any such events.

Ethnic diversity and housing market resilience

We find that LGAs with higher ethnic diversity based on language or place of birth also had a higher diversity in the educational attributes of its residents. Further, LGAs with a higher minority ethnic diversity (as assessed by language spoken at home) were found to have a higher home ownership. LGAs with a higher ethnic (birthplace) birthplace diversity of residents demonstrated increased house prices and reduced days on market in the pre-disaster market. A similar result was obtained on analysing for minority birthplace diversity, language diversity and minority language diversity.

Evaluating each natural disaster in turn, ethnic diversity and language spoken at home mitigates the negative impact of bushfires more in metro LGAs than regional LGAs but does not facilitate faster price recovery. On the other hand, when we evaluate for ethnic diversity of the minority population, we find that increased ethnic diversity of the minority population not just dampens the effect of bushfire but also increases house price recovery across both metro and regional LGAs following bushfires.

Our research demonstrates that this positive relationship between ethnic diversity, housing market resilience and housing market liquidity benefits from birthplace and language diversity of the metro LGA residents. The result is interpreted as that more ethnic diversity brings different skill sets to the LGA thereby improving the capacity of the community to absorb unexpected shocks. The same results are not applicable to regional LGAs.

When a region is affected by a cyclone, ethnic diversity was found to mitigate the initial impact of the cyclone but did not help in the long-term liquidity or recovery of the housing market. Language diversity improves the housing market liquidity, while minority language diversity does the opposite. At the same time, minority birthplace diversity has strong explanatory power to the housing market liquidity after flood and storm, while it has no contribution to changes in house prices.

Similar to the impact of cyclones, in metro LGAs floods and storm, birthplace diversity makes a positive contribution to housing market resilience. Minority birthplace diversity and language diversity mostly improve the housing market resilience after disasters.

Why are these findings important?

The housing market is integral to the Australian economy as the highest investment by value of all asset classes, and its connection with large employment generation sectors: construction, developers, marketing, banking and others. Thus, housing market resilience is crucial for Australia. Our research finds that in Australia housing markets remain resilient to the negative impact of natural disasters except cyclones.

The relationship between natural disasters and housing markets has never been studied across the entire country before, using longitudinal data. Our analysis will provide all stakeholders in the housing market with a nuanced understanding of the impact of natural disasters and ethnic diversity on housing market resilience providing perhaps a new direction for investment and development of hitherto underdeveloped housing markets across Australia. For example, a developer who is deciding on a large-scale project in a disaster-prone zone must assess the price and liquidity of the market when the project is on sale. Having some understanding of how the local market responds to natural disasters in the past and how other regions respond to natural disasters give the developer more assurance. The two concepts of market resilience are measurable using housing market data as demonstrated by this research.

Further, our finding that cyclones have a long-term negative impact on housing markets raise new questions for the construction, building, finance and insurance industries: how we can reduce this risk going forward. There are lessons from history, with the 1974 Cyclone Tracy resulting in a change in the building codes in Darwin, resulting in increased resistance of housing to cyclones. Our findings offer scope for further research in the development of strategies to mitigate the impact of natural disasters, on society and economy therefore on housing market resilience as well. Similarly, further research can evaluate potential new policy frameworks and solutions to address natural disasters.

What are your recommendations?

Our research finds that ethnic diversity does positively impact on housing market resilience. In some ways this is an affirmation of the economic value of the federal immigration policy, suggesting that Australia should continue on this trajectory. A caveat to any such policy can direct increased ethnically diverse migration to LGAs where such diversity is lacking to bring all the benefits of such diversity.

The findings suggest a new pathway for the management of post disaster relief and reconstruction. While heretical, we suggest that disaster relief efforts would be most efficiently utilised in those regions that are likely to be more resilient. Stating this differently, the utilisation of such resources for areas considered unlikely to be resilient is unlikely to change their development, economic or housing market trajectory.

Ethnic diversity is but one component driving regional and urban resilience. This cannot be used in isolation to create long lasting resilience. While we suggest that governments, planners and investors do promote ethnic diversity, this should be in conjunction with efforts to promote diversity in industry and employment at the same time across the entire country. It has been shown that all these factors are inextricably intertwined.

Further we suggest that disaster mitigation and rebuilding programs be reviewed regularly in light of new evidence as demonstrated in our research for the optimal utilisation of public resources. In particular, for the housing market, revisiting building codes to increase housing stock disaster resistance and land zoning rules (for example not allowing new buildings in existing flood plains) will go a long way in ensuring long term housing market resilience.

 

BLEBY, M. 2022. Home settlements surge to $687b – or one third of Australia’s GDP. Australian Financial Review, 9 February.

BULLOCK, M. & ORSMOND, D. 2019. House prices and financial stability: An Australian perspective. In: NIJSKENS, R., LOHUIS, M., HILBERS, P. & HEERINGA, W. (eds.) Hot Property: the housing market in major cities. Amsterdam, The Netherlands: Springer.

 

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