Council announced last month it had resolved to relocate 11 families and build flood shelters for more than 40 others at a cost of up to $18 million rather than upgrade the dam to address newly-identified safety problems.

The decision means many residents downstream of the dam face the prospect of having their land rezoned as a “flood plain”, which they claim could have a disastrous impact on both the value and marketability of their properties.

“For the owners of the 11 houses to be rebuilt it is not such a bad outcome, but for most of the 47 other property owners, this is unacceptable,” said long-term Dungowan Valley resident Peter Bagshaw.

“The main concern of people up here is the depreciation of our property values. Tamworth (council) argues that there won’t be any property devaluation, but I think that’s probably a naive view.”

Dungowan Dam, located about 50km south-east of Tamworth, was built in 1957 and has a storage capacity of 6300 megalitres, supplying up to 50 per cent of the city’s water requirements.

A study completed by Hunter Water Australia last year revealed the predicted consequences of a catastrophic dam break were far more serious than previously thought, with up to 50 lives likely o be lost and damage of up to $100 million.

The council considered a range of responses, ranging from building a new dam at a cost of $160 million, to increasing the capacity of the spillway for between $20 million to $37 million, before settling on the relocation option.

Mr Bagshaw, who is advocating for the dam to be upgraded, said the council’s position that “no amount of structural engineering will remove the risk of impact from flooding downstream” was a “spurious argument”.

“There is always the risk of flooding near any stream and there are always engineering solutions to help mitigate this risk,” he said.

“If councils didn’t do anything because they can’t remove the risk, then they wouldn’t construct anything, such as culverts, bridges, roads or levies, on flood plains.”