Flood risk doesn't matter as bargain houses tempt New Zealand buyers

(Bloomberg) --New Zealand's flood-prone homes are outperforming the rest of the country's moribund housing market, as buyers chase lower prices and shrug off climate risks.

Properties facing the highest flood risk have gained 26.1% in value since January 2020, compared with 19.8% for homes with no exposure, property consultancy Cotality said Tuesday in Wellington. Discounts of as much as NZ$100,000 ($60,000) on some houses are proving too tempting for cost-conscious consumers, it said.

As buyers accept known flood exposure in exchange for a lower price point, those properties are outgrowing the broader market in value, said Cotality Chief Data Officer Craig Dargusch. 

"Our data shows that flood-affected properties trade at an initial discount, but the market is buying them anyway and growing their value faster than the rest," Dargusch said. "Affordability wins today, but risk shapes tomorrow."

The trend underscores the trade-off facing many buyers. Even after a prolonged housing downturn that has cut New Zealand's median house price by around 16% from its 2021 peak, homes remain expensive enough that some buyers are prepared to accept flood risk to get onto the property ladder. This is despite increasingly severe and costly extreme weather.

Read more: World's Biggest Housing Bubble Pops, Roiling New Zealand Economy

Cotality points to two regions hit by major weather disasters in recent years: Auckland, where floods affected thousands of properties in January 2023, and the central North Island region of Hawke's Bay, where Cyclone Gabrielle caused an estimated NZ$14.5 billion in economic damage the following month.

In Auckland, where the median dwelling value sits at NZ$1.05 million, purchasing a home in a flood-susceptible area offers an upfront discount of as much as NZ$100,000, Cotality said. House values in Auckland's impacted zones have grown 18.4% since 2020, while unaffected areas saw values increase 13%.

Similarly, impacted properties in Hawke's Bay outperformed surrounding areas by as much as 5 percentage points. 

Cotality also warned about the insurance implications, especially as providers refine their property-by-property asset risk profiling.

"Insurance availability is becoming the de facto pricing mechanism for climate risk at the property level," Dargusch said. "Because insurance is a non-negotiable prerequisite for mortgage lending, any future retreat by insurers means no loan and no liquidity."