The housing market reaction to the combustible cladding crisis: Safety or financial concerns?

Abstract

The risks of combustible cladding were most catastrophically illustrated by the Grenfell Tower fire in London in mid-2017 which killed 72 people. Prior to this, in late 2014, the Lacrosse Tower fire in Melbourne, Australia, provided a prescient illustration of the risks of combustible cladding. This study examines the effect on Melbourne prices, rents and transactions of these fires from 2005 to mid-2019. The dynamics of prices and rents provide important information about the extent to which the housing market reaction was driven by safety or financial concerns. This is because tenants are primarily exposed to the safety risks of combustible cladding while the prices paid by owner-occupiers reflect both safety and financial concerns – such as future remediation costs. We find an overall decline of around $9\%$ in the prices paid by owner-occupiers for homes affected by combustible cladding, while rents for similar properties fell by around $3\%$ . Thus, we conclude that the main factor driving the housing market reaction was financial concerns. This conclusion is robust to more tightly identifying properties that were affected by combustible cladding. We also find that property investors reduce their property valuations of combustible cladding homes more significantly than owner-occupiers and that there are declines in transaction volumes for affected homes.