How NSW will burn homeowners with its sea-level deception

A couple of years ago I was in a restless room training insurance brokers about climate change risks to their small and medium-sized clients. At least one-third said they were not convinced about climate change but, since they mostly sold insurance for events that never happened anyway, they didn’t see this opinion as a obstacle. So we got on OK.

But then this guy stood up and told me his friend had lost half a million dollars because of climate change. 

Our man’s friend, let's call him 'Dave', was a builder-developer – a tradie who bought and renovated. He’d picked up a property north of Sydney – a nice place near the coast on the banks of a protected waterway. Just the sort of location desired by cashed up Sydneysiders being priced out of the city.  

But there was the problem. He’d bought the existing house and land and had designed a two-storey home with lots of bedrooms and bathrooms that would be worth about $1 million. Houses in NSW usually have to be built to last 100 years and the council had put in a new provision to accommodate about 1m of sea level rise over that time. So he had to raise the floor about a metre, but there was a height restriction on the street which meant there wasn’t enough room between the new floor height and the old roof-line to fit in two storeys. And that meant halving the floor area and $500,000 dollars out of the window. 

Apparently, he wasn’t happy and he wasn’t taking it on the chin. So perhaps he was among the people who have persuaded the NSW government to remove statewide sea level rise benchmarks and introduce last week's removal of mandatory disclosure of future risks.

I’m not sure if Joe Hockey has seen this new policy, but I don’t think he would be happy because this is classic conservative old school versus new school dilemma. 'Old school' is all about property rights, 'new school' is about the market. According to the last year’s Productivity Commission review, governments don’t have to worry about society’s adaptation to climate change because a properly operating market will naturally drive adaptation through pricing.

But a market does not operate properly if information is deliberately removed from the normal process of disclosure and transaction. To be fair, there is provision for councils to put in planning protections for climate change related risk as they see fit, but if they don’t see fit – or in the interim – people won’t be told unless they ask.

Now, I think the Americans' describe this type of policy approach as ‘kicking the can down the street’ – which means putting off the inevitable need to pick it up and put it in the bin. To explain, let me introduce 'Jim'. Dave to the best of my knowledge was real, but Jim is definitely hypothetical. 

Jim was being priced out of the Sydney housing market and he was looking for more value for money. He finds a fantastic, newly built house for sale. He can buy a large waterfront house for the price of an inner city dog-box. He’s buying it off the builder and it ticks all of the latest building boxes. His conveyancing lawyer does the usual checks; all good, the sale goes ahead.

What the conveyancing lawyer checked – as obliged by law – was a thing called the 149(2) certificate which showed current material risks to the property. For example, there wasn’t a runway about to be built in the front yard and it wasn’t in a flood zone. But what this certificate used to show and now didn’t anymore was that, with a small amount of sea level rise, this property would be pushed into an area at risk of coast inundation with a flood return frequency greater than one in 100. It didn’t tell him that council was consequently planning to make planning changes that would constrain what could be done with the property and the land. This information was now in something called the 149(5) certificate which could be purchased for a fee if anyone was interested – but wasn’t required by law to be checked by the conveyance.

And so Jim knew none of this. And David got to build the house he wanted to build and he got that $500,000 he feared might evade him. Dave bought a great value house. So everyone was happy. 

Until ...

Jim got a note from his insurer saying that, because of revised hydrological flood projections, they were no longer providing cover for riverine flooding and any coastal inundation was not covered anyway. He called them a few names and then called some other companies to find that most other companies were not providing any type of cover for his street anymore.  So he had no choice but to stick to the same insurer. They tried to be constructive by suggesting reorganising the house to have the major living areas upstairs and to keep the downstairs for storage and garage and to consider changing to flood resilient materials when he wanted to renovate. He explained it was a very new house.  Property values in the street have dropped since the news has leaked out, and Jim reckons he’ll be down about $500,000. 

Whereas in the stock market an action by one party to conceal information so as to deliberately gain a time-limited advantage is an offence, in the property market it would appear to be not only allowed but facilitated. 

In 2011 Australia reeled from the swathe of flood damage across Brisbane, and the people of NSW reeled again when they were asked to pay to fix thousands of Brisbane houses built on land that had be known to flood. But did we learn?  Yes, we did – the use of the 149(5) to conceal material risks projected to affect a building over its design life is probably just NSW returning the favour.

Karl Mallon is director of corporate risk at Climate Risk.