Floods, Fears and Forecasts

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Before I get into too much detail, happy new year to everyone and to those effected by the floods, our thoughts are with you.  On that note, I hope I don’t offend anyone in the following commentary as that is clearly not out intention.  And praise where praise is due, the media has been outstanding with this event as has the public “will” to get their hands dirty and start the clean up.  It is enough to instil faith in the general goodness of communities, it is unfortunate it takes an event of this magnitude to bring it gushing to the surface.

One of the most common questions we have been asked after the floods have subsided is, “what are riverfront property prices going to do?”  Well in the short term one would anticipate that those that went under will probably experience a softening in value, whilst those that stayed dry are more than likely going to attract a premium. However, and it is a big however, the values of the properties that went under will be significantly influenced by their ability to get insurance cover in the coming years.  If insurers are prepared to accept that the last major flood occurred roughly 37 years ago, it is not a particularly regular occurrence.  If insurers will underwrite properties for flood damage (on the basis of reasonable annual premiums) it is highly likely that the values won’t change too much at all.

Having said that, there was flooding and then there was FLOODING.  Brisbane in many respects got off pretty lightly.  There was enough warning that almost everyone was able to taking prized possessions and memorabilia with them.  This was not so in small centres such as Grantham that has been quite literally devastated.  Feedback we have been given by residents there is that some will find it difficult to move back in for fear of hearing rain on their roof.  A perfectly understandable reaction.  Brisbane was not threatened in the same way so the general reaction is likely to be significantly different as a result.

Perhaps the question that is not getting enough airplay is why has it taken 37 years for another major flood event to hit Brisbane?  After the 1974 floods, Brisbane’s forefathers were clever enough to put in place the Wivenhoe Dam which has largely protected the City for more than three decades.  Whilst the latest round of finger pointing about the management of the Dam is disappointing, there can be no doubt that mitigation strategies will already be under consideration by engineers, geologists and hydrologists.  The point being, assuming that this is the case, riverfront properties will get another layer of protection that in theory should make another flood event of this scale even further between.

Towards the end of 2010, National Property Research was forecasting a skills shortage in Queensland that was likely to hit in the second half of 2011.  We are in the process of revising this to the second quarter of 2011.  Whilst the floods have created significant damage, they will also create enormous opportunity for those businesses that have survived.  Unfortunately driving around Rocklea as an example, it is likely that many businesses that were sailing close to the wind due to the GFC, may find themselves in unrecoverable positions.  This is the economic downside to the flood.  Jobs will be lost, however we anticipate that more jobs will be created than those that were/are lost.

The opportunities that come out of a flood disaster are numerous.  The most obvious is the localised injection into the construction sector.  For many Queensland businesses that have continued to downsize on the back of declining business, the rebuilding of Brisbane and many regional centres is a priority. Add to this the growing demand for trades and skilled workers in places like Gladstone to assist with major LNG and Coal Port projects and Queensland is actually positioned quite well to use this event as a springboard to a more positive outlook. 

Because our State has flooded does not mean the rest of the world has stopped requiring our natural resources.  The reality is that the bottle-necks have got worse and will require millions of dollars to open the supply chain.  Spending on infrastructure upgrades will require Federal government assistance, there is simply no getting around that.  Just when the Bligh Government would have been looking at spending the proceeds from the QR National sale, I suspect that their plans will have changed.  Let’s hope the rating agencies don’t downgrade Queensland’s credit rating any further, because the funds required to fix this mess don’t need to be borrowed at any higher rates.

Retail spending will also be a localised beneficiary of the floods.  Everything from carpet suppliers, furniture to electrical and white goods will see an uplift in sales for the first two quarters of 2011.  After a relatively quiet festive season by previous standards, many retailers will not experience the post Christmas hangover.

One shouldn’t forget the rural sector in all of this.  Many crops and livestock have been lost, fences removed completely from their boundaries and millions of dollars in machinery have been destroyed.  However as one farmer eloquently put it, “we can make money in the mud, but we can’t in the dust.”  Whilst they haven’t enjoyed the flood experience, they have at least got moisture in the soil that should make the next season a bumper.  Farmers are probably the most resilient bunch of people you are likely to meet, they are also the most finely tuned to the environment.  Perhaps there is a lesson in that for many of us.

Perhaps the most frustrating part of the many questions that we have fielded about property and the flood, has related to the lack of reliable data from 1974/75 where sample sizes are tiny and unreliable.  However, one should be very careful in comparing the 1974 floods to those of 2011.  Fortunately for many flood affected homes, the levels peaked and dropped within two days.  In 1974 the city was flooded for 1 week and no one had the benefits of mobile phones and 24 hour media sources to keep track of the events.

But perhaps the greatest problem with comparing the two events is the context in both the economy, world events and obviously the advances in technology created through time and growth.  In 1974, the total population of Queensland was approximately 2.033 million people; in 2010 the SEQ total population is likely to be around 3.13 million when it is finalised.  What this means is that the scale of the even in comparison to the broader community is by comparison much less.  It also means that any sort of clean up after the event is significantly enhanced by the fact that there are more bob cats, trucks and people to get in and get busy.  At certain points in the clean up process, volunteers were being turned away or asked to come back later.  This is astounding both from the perspective of people wanting to help and the resources available to clean things up.

Scarily, in 1974 Brisbane’s CPI peaked at 15.9% for the September quarter, the highest recorded for Brisbane in the 60 year time series.  So if you are concerned about inflationary pressure now, well 1974 is a stark reminder about what happens when the cash rate is not independently managed from the government.

Another interesting statistic is that the expected damage to property in the 1974 floods was $980 million as estimated by the Australian Insurance Council.  Insurance cover was only $68 million.  It will be fascinating to see if the ratio’s are so far out this time round.  One would hope that this is not the case however in 2009, the same council was trying to find ways to create greater access to flood insurance for Australian communities.  Ominously they state, “In 2007 dollar terms, should such a flood (Brisbane 1974) ever be repeated, this represents an insurance loss of $1.8 billion and a simply staggering uninsured loss for both government and the affected community.”

So where does this leave Queensland and her flood affected cities and towns?  Obviously in need of short term clean ups.  However the outlook will improve throughout 2011 assuming that there are no more events of similar scale and ferocity.  Insurers are either going to be the hero or the villain.  They will to a large extent determine what happens to values in our riverfront suburbs.  Our trades and construction workers will have a big year.  Disaster of this scale means a lot of rebuilding that has to be done.  There is no escaping that if Queensland is to get back on its feet quickly, the construction sector is going to be flat out.

So after what has been the most unusual start to a year that many of us have experienced in decades, our thoughts are with those who have suffered damage, had memories destroyed and lost loved ones.  Let’s hope NPR’s crystal ball about the resilience and character of Queensland’s population and better than expected economic performance at a personal level ring true.  And most importantly, I hope that our neighbourliness is neither lost nor forgotten.