Thursday, October 19, 2023

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HoneIn FY24 Q1: Real Estate Insurance Market Update

Housing affordability and the rental crisis remain front of mind for our Real Estate Partners. While the government’s commitment to housing supply is a positive sign for the real estate and strata industry, reprieve might be years away.

Key insurance outtakes from Q1

After the significant Australian insurance catastrophe events in early 2022, the past 12 months of insurance events have been tempered in comparison and have provided insurers with some much-needed relief. Real estate insurance premiums continue to increase, mainly driven by inflation and insurers recouping historical claims losses. The global supply chain for building products has seen little to no reprieve, adding further additional pressure to claim costs, which are already sitting at inflated levels. Significant net overseas migration is helping to alleviate the skills shortage but is also compounding the rental crisis.

Looking at international influences on the strata, property and real estate market for reinsurance, the Northern Hemisphere summer of 2023 has been recorded as the hottest in recent history. El Niño pushed up temperatures and drove extreme weather events across much of the Northern Hemisphere and this in turn has kept up the pressure on global reinsurance markets.

In Australia, there have been recent bushfires in NSW and Victoria, along with some flooding in the Gippsland region. These events have primarily affected sparsely populated rural areas and have had a relatively minor impact on insurance losses. Nevertheless, they could serve as concerning indicators for the upcoming season.

Industry insights for Q1  

A red-hot housing market continues as prices hit a new post-pandemic record high. The combined value of Australian housing rebounded to $10 trillion at the end of August 2023, the first time the total estimated value hit double digits since June 2022. From a housing debt perspective, inflation is growing at its fastest pace in 20 years. Australia's annual inflation rate has hit 7%, according to the Australian Bureau of Statistics’ latest quarterly figures. The RBA has now increased rates 12 times since May 2022 to 4.1 per cent, taking rates to their highest level since they sat at 4.25% in April 2012. The Senate inquiry in August heard that almost 650,000 households across Australia were experiencing some form of financial stress, with stories of renters struggling amid soaring prices and low vacancy rates.  

Residential Landlords

Housing affordability and the rental crisis remain front of mind for our Real Estate Partners. Rental vacancies and the share of properties available to rent in Australia have hit a record low of 1.10%, and the annual rent increase is currently sitting at over 16%. In the past two and a half years, median rent values have risen by as much as they did in the entire 13 and a half years before that.

Housing Australia Future Fund (Haff) – Will It Fix The Housing Crisis?

The Housing Australia Future Fund is a $10 billion investment fund the government will create, with the returns each year used to create social and affordable housing. This investment will provide a long-running supply of social and affordable rental housing.

How will it work?

The Housing Australia Future Fund is touted as a $10 billion policy – but that's not how much will go directly into building new homes. $10 billion will go into an investment fund and the fund can lose or gain money annually. However, the government guarantees a minimum housing spend of $500 million each year, regardless of the fund's performance.

How many homes will be built?

The government says 30,000 new social and affordable rental homes will be built over the fund’s first five years (6,000 annually). We don't know exactly where all 30,000 homes will be built, but we do know every state and territory will receive at least 1200 each.

Will HALF fix the housing crisis?

Industries state HAFF is unlikely to close the gap of the 25,000 social and affordable homes needed annually as the fund will only cover 20% of the current five-year forecasted need. Investment into townhouses and apartments will need to occur as a priority due to the lack of available green sites for building. The government’s commitment to housing supply is a positive sign for the real estate and strata industry, however, reprieve is years away, with the additional pressures of increased population growth continuing to intensify.

What do these developments mean for the insurance Industry?

Property Managers are feeling the brunt of a highly competitive market. Advances in technology to ease and appease their workload are of high value. The need to ensure Landlord Insurance limits are set in line with the current rental agreement and Rent Default cover has been selected has never been more important as pressure on household budgets mounts. Ensuring Property Managers are skilled and supported can help reduce the Professional Indemnity exposure for the agency in times of high contest.

Developments to watch over FY24

If a summer of catastrophic events in Australia does eventuate, we expect to see property insurance as a remaining challenge for another year with higher excesses, restricted cover relating to areas such as floods and increasing premiums.

The cost of living crisis combined with the current rental crisis and mounting household budget pressure has the potential to flow through to an increase in Rent Default related claims.  

Build To Rent (BTR) accommodation will be an important investment for the sector to embrace in the next year with the number of investors targeting Australian Build-to-Rent (BTR) having grown exponentially over the past 2 years. The pipeline has already seen a 50% increase this year, highlighting the growing interest. The involvement of institutional investors is pivotal for the success of BTR.

The Australian short-term rental market has been growing strongly. The sector has increased almost 23% over the past year. Victoria will be the first state to implement a levy on short-stay accommodation and some politicians are advocating for rental caps and better regulation of short-term rentals like Airbnb. UNSW has looked at both sides of the issue saying that a two-year emergency rent cap could offer relief to tenants, but it might also result in landlords choosing to sell their properties.

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Honan Insurance Group Pty Ltd is now fully owned by Marsh Pty Ltd. To find out more, speak to your broker or read the announcement