House prices will eventually reflect catastrophe risk in major cities

Published: November 30, 2017

Updated: July 24, 2018

Author: Luke Jones

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Humans throughout history have decided to build on areas under consistent threat from natural disasters and today those settlements have become some of our greatest metropolises. With cat event increasing in frequency and severity, will the price of property eventually reflect the danger posed by certain locations?

Cost-benefit analysis still suggests it is worth living in a disaster-prone city, says Yolande Barnes, head of Savills World Research.

“What’s most intriguing is that the really big cities continue to grow and thrive in risky places, and that’s because their economic advantages outweigh the risks,” Barnes told The Financial Times.

Los Angeles is a prime example. It is located in a notorious earthquake region, while it is also frequently subjected to wild fires and other events. Still, people want to live in L.A., where demand for homes is the highest it as ever been and square foot prices for properties have soared by 65% in the last five years.

“Los Angeles is subject to – and has suffered – catastrophic earthquakes in relatively recent memory, but it’s a huge success story,” Barnes added. “It brings in people from all over the world (who) are drawn there by the thriving economy and a wide variety of prosperous industries, including entertainment, creative and tech.”

Japan’s capital city Tokyo is home to over 20 million people who all live in an earthquake zone. The Financial Times reports the city is more in-tune with connecting property prices with catastrophe risk. Homes in Tokyo are devaluing around 2% per year and new builds that are anti-earthquake are becoming popular.

“Even without a catastrophic earthquake, there is the expectation that you need to replace buildings after about 35 years because those materials deteriorate,” Barnes said. “That’s become ingrained in practice.”