The purpose of cladding on buildings is to provide protection against the weather and improve the appearance of the building but in some cases it can endanger the inhabitants and the surrounding community. Combustible cladding increases the rate at which fire spreads, causing it to develop at an accelerated speed and intensity. This was most tragically demonstrated by the Grenfell Tower fire in London in 2017, which killed 72 people. Similarly, the Lacrosse Tower fire in Melbourne in 2014 served as a clear warning about the dangers of combustible cladding.
These two events triggered a crisis in the property industry—effecting policy and planning regulators, building and materials importers, and property owners, occupants and investors. Dr Daniel Melser examined the impact this crisis has had on the housing market in Melbourne, Australia. Specifically, he examined how the fires in Lacrosse Tower and Grenfell effected housing prices, rents, and transaction frequency.
Changes in rents and the prices of properties provide important information about whether the reaction to the fires was motivated by concerns about safety or financial repercussions. This can be revealed by comparing changes in rents versus changes in property prices—tenants are largely exposed to the safety risks of combustible cladding, while owner-occupiers take on both safety and financial risks. The decline in value could relate to safety concerns or the costs that are likely to be required to remediate the building (i.e., to remove the combustible cladding).
Using data from Australian Property Monitors, accessed via AURIN, Melser studied the changes in property prices and rents in Melbourne. He used a difference-in-difference (DID) method to examine trends in prices and rents from before and after the fires, comparing them against the control group of properties.
The control group of properties was built before 1997, which was unlikely to have combustible cladding. He then compared these properties to those built after 1997, which had a higher chance of having combustible cladding, and a subset of properties that were almost certain to contain combustible cladding. He dealt with the limitations of the DID method by applying a novel approach—he developed a method to reweight the sample of properties that did not have combustible cladding so it looked more like the sample of buildings that did have combustible cladding.
His analysis revealed that owner-occupiers paid approximately 9% less for properties with combustible cladding compared to those without. By comparison rental properties were only 3% cheaper than those without combustible cladding. The smaller decline in rental prices suggests that the lower property prices were mainly driven by concerns about the financial risks associated with combustible cladding rather than safety risks. This conclusion remained consistent even when Melser used a stricter definition of affected properties.
Melser’s research also revealed that investors perceived combustible cladding as a higher risk compared to owner-occupiers. Investors required an additional 2% discount to purchase a property likely to have combustible cladding, compared to owner-occupiers.
Interestingly the biggest price adjustments in properties occurred after the Lacrosse Tower fire, while rent adjustments were more prevalent after the Grenfell Tower fire. There was also a significant decrease in the transaction frequency of properties with combustible cladding.
In 2021 the Victorian government banned combustible cladding, a world first. They also created the specialised agency, Cladding Safety Victoria, to address the existing problem. So far 360 private and government owned buildings with high risk cladding have been fixed. The focus of the program is now on assisting building owners with securing cladding that poses a lower risk.
Research like Melser’s fills an important gap in the available information about the impact combustible cladding has on the housing market. His research was supported by data made available by AURIN.
Read the full article here:
Melser, D. (2023). The housing market reaction to the combustible cladding crisis: Safety or financial concerns? Urban Studies, 60(4), 620-637.
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