All eyes on what’s next for flood-prone homes

While flooding was once considered a rarity, we are increasingly seeing homes devastated by frequent flooding, raising the question of how this will affect their valuation and mortgage prospects.

During the recent Storm Henk, more than 100 properties were affected by the flood water in Leicestershire, while one unfortunate village in Nottinghamshire has been surrounded by flood water nine times in less than three months.

For any prospective buyer in a flood-prone area, the notion of having to pre-stock sandbags in anticipation of such an event is surely not going to be on their buyer’s wish list.

Yet while the threat of severe floods might deter some buyers, property demand and values can still hold strong in some locations. Often, the natural beauty of an area in close proximity to a lake or river can offset some of the risk of being flood-prone for buyers.

Speaking at a Treasury Committee meeting last year, Matt Hammerstein, the CEO of Barclays UK, estimated properties in flood-risk areas typically carry a value of just 3‐8% lower than those with no risk.

As climate change intensifies and the flood threat grows however, it will be interesting to see whether house values in affected areas continue to be only minimally impacted.

The likelihood of extreme weather events has quadrupled since 1970, with 17 record-breaking months of rainfall recorded since 1910, nine of which have occurred since the year 2000, according to the Environment Agency. We are also increasingly seeing more inland flooding, occurring in places you might not typically associate with flood risk.

As well as the potential impact on a property’s value, there is also its mortgageability to consider. As flooding becomes more widespread, identifying homes and borrowers in flood-prone areas could become more of a focus for lenders.

A property’s flood risk is already factored into a lender’s mortgage decision but providing there is adequate insurance in place, most are happy to lend.

As it stands, even for the most flood prone areas, insurance is available, thanks to the Flood Re scheme. This scheme was introduced in April 2016 as a joint initiative between the Government and insurers, with the Government subsidising the cost of flood insurance in high-risk areas.

Over the past year the number of households benefiting from a Flood Re-backed insurance policy has grown by 3.6% to 265,826, with more than half a million households having benefited since its launch in 2016.

The scheme, however, is due to come to a close in 2039, at which point it is hoped insurers will be in a position to offer affordable policies due to the risk of flooding being reduced either through more preventive measures from homeowners or improved flood defences.

While the Government has doubled its spending on flood defences in recent years, reports claim rising inflation has led to a 40% reduction in the number of properties it plans to better protect from flooding by 2027.

Of course, a mortgage lender’s decision to lend on a property in a flood risk area will be dependent on the homeowner’s ability to have adequate insurance in place. So, I expect as we draw closer to 2039, it will be not just the insurance industry but also the mortgage market which will be monitoring events closely.

Recent figures from the Association of British Insurers (ABI) highlight the staggering financial toll of the extreme storms. It estimates insurers paid out an estimated £560m to help customers who suffered damage caused by Storms Babet, Ciaran and Debi that struck last October and November. That is without factoring in the recent Storm Henk.

Homeowners faced the brunt of the damage, accounting for £352m in claims, while businesses and vehicles account for £155m and £53m respectively.

In the short term, if extreme flooding persists, it wouldn’t be surprising to see lenders giving increased consideration to a property’s flood risk. It not only poses a potential problem for new lending but could also create issues for those looking to remortgage further down the road if they find themselves in a flood-prone location with diminishing buyer appetite.

Simon Jackson is managing director at SDL Surveying

First published with The Intermediary

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