Norfolks online estate agents. Est. 2007

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6 August 2007

  • For the thousands whose homes were flooded in recent weeks, there are more pressing concerns right now than the value of their properties. But there are some important financial implications, and not just in terms of the immediate costs. The floods could well prove to be the catalyst for major changes in the housing market - not just in flood-prone areas, but all across the country.

Let me explain. In the past, when floods or natural disasters have taken place, they have tended to push down house prices in the affected areas. Clearly, anyone looking for a house at the moment will consider whether their potential home is in a flooded area.

Previously, things have returned to normal after six months, with the gap between flood-prone houses and others receding. Might things be different this time around? That depends on whether you think the floods were severe enough to scar buyers' collective memory permanently. If there is a repeat this winter or next summer - both quite feasible - it will be hard for anyone to dismiss the floods as a rare, freak event.

On the other hand, the likely government reaction to the disaster may soothe buyers' fears. The promise of new and advanced flood defences may be enough to set prices back on their way after a few months.

However, there are more deep-seated reasons to fear that prices may remain low for longer, and this is because of the way homes are insured. Many people buying homes in the areas affected by the recent floods have unwittingly been benefiting from under-priced insurance. The British insurance system is unusual, in that private firms cover flood damage to homes, rather than the government, as is the case in most other countries. When there is a big payout - as with the estimated £3 billion bill from the latest round of flooding - part of that is effectively paid by those who pay premiums in flood-proof areas.

This cosy arrangement, which was in part possible because the government promised to invest in flood defences, may come to an end following the recent deluge. Insurers are already privately balking at the cost, and, like homeowners, are furious over the state's apparent negligence in preparing for this disaster. If the arrangement broke down, insurance costs for affected homeowners would soar; likewise, their house prices would fall - by how much, no one can yet guess. Getting a mortgage in these areas could also become far more difficult, according to Lis Gibson of Deloitte, who thinks that banks may reconsider the wisdom of taking a 25-year bet on these properties' values.

These are sobering thoughts - not least for those in flood-prone areas. It may be better news for those on higher ground, who are more likely to see house prices rise, and may even see their insurance premiums fall. Either way, with thousands of the new affordable homes slated to be built on the flood plains of the South-East, none of us can afford to ignore the risk any more.

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