Possum: floods, prices and mortality

With the floodwaters receding in Queensland — giving us our first real look at the size of the damage involved — it might be worth going back and having a bit of a squiz at what happened on the economic front immediately following the last big south-east Queensland flood drama in January 1974. We’ll also take a peek at an interesting mortality stat while we’re at it.

Just about every large destructive event — be it flood, fire or cyclone — has consequences on the prices of goods and services at the local level. For example, if cauliflower farmers were wiped out, cauliflowers would become scarce and the prices would rise. Similarly, if a large number of households had their carpets destroyed by flooding — we’d expect a surge in the number of people trying to buy new replacement carpet, increasing demand for carpet and lifting the price of carpet in the short term as a result.

Often people will fall into the trap of calling this “price gouging” — but in reality, it usually has far, far more to do with ordinary people (you and me) bidding up the price of scarce goods and services, than it does with caricatures of evil retailers rubbing their hands with glee as they make abnormal profits by exploiting the desperation of disaster victims.

The fallout from the 1974 floods is a pretty good textbook example of the sorts of price change differentials we usually see after a disaster. If we look at the Consumer Price Index at the time and see how the prices of various goods and services changed between December 1973 and December 1974 in Brisbane compared to the national level, this is what we get:

Perhaps somewhat surprising is how the price of food in Brisbane increased at a rate substantially less than the rest of country over the period. What isn’t surprising, however, is the way household contents and services jumped nearly a percent higher in price compared to the national average — jumping 5.5% over the year compared to the national average increase of 4.7% .

This comes back to what we mentioned earlier — as household goods that were ruined in the flood had to be replaced, the large bulge in demand (rather than price gouging) simply pushed the prices up. We should expect to see something similar happen in Brisbane over the next 12 months or so on a variety of goods and services.

One of the interesting things about the fallout of the ’74 flood was that while the cost of housing increased more in Brisbane than it did nationally (jumping 4.1% over the period compared to the national average of 3.7%) — the increase in cost wasn’t as high as many had expected. There’s quite a bit of anxiety around Brisbane at the moment — particularly in the rental market — that the flood might push up housing costs significantly. Let’s hope that fallout is more akin to 1974 than the 7% and 8% increases that some folks in the property industry are currently throwing around.

The other interesting part on the economic side of the ’74 flood was what happened in the construction industry. On the residential construction side, as we were heading into 1974, the country as a whole was experiencing a bit of a residential construction downturn. If we look at the quarterly change in dwelling unit commencements for Queensland and for Australia as a whole over the period, what we see is that the ’74 flood gave Queensland a larger than average downturn, but with a slightly higher than average bounce back on the recovery.

But the real story was non-residential construction. When people mention non-residential construction, the first thing that comes to many a mind is CBD high-rise office blocks and a sky full of cranes. Yet the reality isn’t actually that exciting. High-rise office buildings only make up a relatively small proportion of the total value of non-residential construction — usually between about 5% and 15%, depending on the year. The bulk of non-residential construction is generally made up of things like shops and shopping centres, warehouses, hospitals and school buildings — and usually not in the CBDs of the nation, but out in the ‘burbs.

Heading in to 1974, non-residential construction in Queensland was growing along fairly robustly. It was nothing to write home about, but it wasn’t sluggish by any yardstick. Then around the time of the flood, something extraordinary happened.

It just took off.

The flood line in the chart sits on the final observation before the January ’74 flood — which was December 1973. The big kick along happened pretty much when the flood occurred, which we can also see if we look at the annualised percentage change in non-residential construction value in Queensland. Note the mountain of growth that immediately followed the flood.