The knock-on effects of flood exposed property

The knock-on effects of flood exposed property

The devastation that homeowners and business owners have experienced in the flood-affected areas in recent weeks is unfortunately likely to continue for some time. The harsh reality is that property values in most of these areas (particularly in Brisbane) will drop quite significantly as they did in areas affected in the 1974 Queensland floods. I have spoken extensively to one of my Brisbane real estate contacts who was working in real estate in 1974 and he tells me that most of property which was affected at that time dropped in value by between 20% and 50% and in some cases even more.

Because of this the banks may choose, or essentially be forced by their mortgage insurers, to have flood-affected property revalued. The results can be overwhelming for property owners where their property is revalued significantly lower than it was valued just prior to the flood event.

By way of example let’s say a property is valued at a million dollars and the owners have 30% equity (they owe $700,000 before the flooding event). If the property is then revalued at say $700,000 (30% lower) post flooding, then the owner goes from having 30% equity to 0% equity (they have just lost $300,000). The bank may then require that customers to bring their Loan to Value Ratio (LVR) level back in line with the bank’s current lending policies. If that’s say now a 70% to 80% LVR then the owner in this case would be required to pay the bank between $210,000 and $140,000 respectively just to return their loan to a similar equity position to that before the flood.

One of the reasons values will drop is due to the rental return or what is known as 'yield'. Think about it for a second - if you’re a prospective tenant and you know that a commercial (or residential property for that matter) has the potential to be flood exposed then the property will be less desirable than a lower risk property. This will result in lower rental rates which will in turn have an impact on value.

Fortunately the banks tend not to view residential property as rigidly as commercial property as in the above example. However when people start selling their flood-affected properties (and they will) the price they are now likely to achieve will be significantly lower than they would have received a few weeks ago. In addition many people will be required to sell because they don't have insurance or the equity to draw upon to renovate or in some cases rebuild (as happened in 1974) and this will drop the values of all properties in the flood-affected areas significantly. So, based on what happened in 1974, a large percentage of the Brisbane properties affected are currently in a serious negative equity position right now.

Categories: Investment Property