Floods and other factors in the housing market

The recent floods in the UK have been a tragedy for those directly involved. Not only are they suffering from temporary homelessness, and the lack of immediate funds to get them back into their homes, but of course they are likely to have problems selling up and moving out.  What impact will the floods have on the future valued of flooded homes and indeed, the wider market in general?

Some reports suggest that up to 80% of the value may be cut from the value of property in flooded areas. It is possible to conceive of that being the case if they were to try and sell their property with floodwater still lapping at the kitchen units, discolouration and smell a running theme, and the threat of damp in the offing. However, for anyone who can wait a bit longer the situation should not be so dire.

In September 2004, Liverpool John Moores University and the University of Wolverhampton carried out research for the Royal Institution of Chartered Surveyors to look at the impact of flooding on the values of residential property. That suggested that a 40% devaluation of their property should be the worst they could fear. That is of course still a devastating figure, but in fact the mean devaluation for properties turned out to be 12%.

Of course there is no set formula for working out how much a flooded home might suffer in it value. There are a large number of questions that would need to be answered: what is the demand like for the sort of property? How badly was it damaged? Was it flooded previously and what is the estimate for future flooding?

Gloucestershire and Oxfordshire were very badly affected by the recent floods, the worst since 1947. If we could reliably say that such disaster happen, on average, once every sixty years then the value of properties should not remain depressed for very long. However, what might have been seen as a freak event in 1947 is seen as just part of the trend of climate change in 2007 – with commentators suggesting that repeats are likely to be more frequent as weather conditions fluctuate to wilder extremes. Even if were only once every 60 years, it takes time for perspective to be restored after such a devastating event and for valuations to recover. Calls for improved flood defences in threatened areas will hopefully bring the response required which would help to restore faith in areas that have suffered from flooding.

The joint universities research suggests that flooded property values recover with some variability given no recurrence and a visibly reduced threat of recurrence. The attitude of insurers is also said to be an important factor on value and saleability of flooded property. Without insurance it is nigh on impossible to get a mortgage – and without a mortgage: no purchase. The government and insurance industry have agreed to provide competitive cover in most areas. Nevertheless some are left without cover, and future cover is likely to be very expensive. It may be that insurers offer cover except for flood cover, which would make it almost impossible for an owner to sell a home in a threatened area.

The difficulty in forecasting the where, when and impact of floods makes the whole business complicated. More accurate and timely information is required to assist in the assessment of flood risk. Cover might then be negotiable. It would also focus the mind of authorities and owners on what flood defence measures they could put in place.

In fact it seems that most flood-risk properties do not lose value unless they have been directly affected by a flood. Initial reaction to such a disaster is a reduction in value, but it recovers over time. It is therefore unlikely that recent floods will have a long-term impact on the UK housing market as a whole. There are more critical factors involved.

The most important of these factors is of course rising interest rates. Figures from the CML have shown increasing numbers of repossessions in recent months and it isn’t surprising. Rates have risen from 4.5% to 5.75% in twelve months and there has been a steady increase in those having difficulty in meeting monthly repayments. While numbers of repossessions have been going up, strangely the numbers in arrears has actually gone down. This may well be a function of the time lag between a change of rate and when it actually affects borrowers. It seems inevitable that towards the end of this year borrowers will start to feel the true impact of the rate rises and the number in arrears will be up.

The impact of base rates does seem to have caught up with house price inflation and that seems to be cooling. Nationwide report the underlying trend growth to be on a downward path, and the view is echoed by Halifax’s latest figures.

Despite all this there remains a shortage of housing stock which will keep the market buoyant in certain areas. A crash seems unlikely, a soft fall seems certain.