Climate Change and Property Values
The Financial Awakening
Rising sea levels, biodiversity collapse, and extreme weather are ānot the only concerns of climate change. Financial institutions areā¤ also starting to recognize the massive problem it poses. Property, valued at nearly $380 trillion globally, is the world’s largestā¤ store of wealth. However, aā¢ new type of toxic asset is emerging in property portfolios,ā¢ particularly in areas vulnerable to climateā change. Lenders are becoming increasingly ā¢ reluctant to lend against these risky assets.
High-Risk Properties
In āthe Asia-Pacific region, nearly one in tenā properties ownedā by āreal estate investmentā¢ trusts could be at “high risk” of climate-change-related damage, especially āthose on seafronts, āaccording to a report from climate riskā£ consultancy XDI. Dave Burt, founder and ā£CEO of DeltaTerra Capital, notes, ā
“Some communities are just going to become ā¢much more expensive to preserve.”
Banksā likeā£ HSBC are starting to ā¤highlight climate risksā£ to borrowers,ā£ but Burt argues that buyers aren’t always informed about the long-term risks or the potential devaluation ofā their properties.
Continued Coastal Investments
Despite the risks, many people continue to buy coastal properties, often paying higher prices. This fuels the argument of climate-change deniers who claim that if billionaires are still buying coastalā properties, climate change must be a hoax. However, this perspective overlooksā the long-term risks and the potential for significant property devaluation.
Scientific Warningsā¢ and Insurance Challenges
Long-Standing Concerns
Climate scientists have been warning about these risks for years. Laura Moore, a professor at the University of North Carolina at ā¢Chapel Hill, expressed concerns over a decade ago aboutā¤ properties in ā¢the Outer Banks. ā£Now, some of āthese homes are collapsingā¢ due to storms reshaping the islands. Moore explains that sea-level rise will only hasten the damage, making it increasingly difficult to ā£insure homes in coastal areas.
Engineering Limitations
In places like the Outer Banks, building seawalls is not āaā£ viable solution. These barrier ā¤islands naturally shift over time, and seawalls can disrupt this process, āmaking ā¢the interior of the island more susceptible to flooding. Burt and others areā£ concerned that no amount of engineering will solve these problems in certain areas.
Financial Industry’s Response
Slow Adaptation
Banks haveā been slow toā£ offer products that help homeowners reduce climate-related risks. However, there are signs of gradualā movement towards helping homeowners adapt. Lenders are recognizing that energyā efficiency impacts property value. In ā¤the UK,ā¢ homesā are rated for energy efficiency, and banks prefer properties with higherā£ ratings.
Green Mortgages
Research āfrom the Bank of England suggests that people with energy-efficient properties are more likely to keep ā¢up with their mortgage payments. This has led to the rise of “green mortgages” orā£ “energy-efficient mortgages,” which offer better interest rates or cash-back bonusesā¤ for properties with good energy ratings. Rachael Hunnisett from the UK’s Green Finance Institute notes,
“Retrofit is going to happen. If mortgage lenders are at the forefront of ā£that, they are protecting their customers.”
Clean Energy Investments
Clean energy firms are benefiting from this shift. Aira, a Swedish firm, recently secured āa ā¬200 million deal with BNP Paribas to allow customers ā¢in Germany to pay for heat pumps in installments. Eirik Winter, BNP Paribasā CEO āin the ā£Nordic region, states,
“Banks and financial institutions have a huge responsibility to accelerate the energy transition.”
Future Challenges and Solutions
Economic Risks
Luca Bertalot from the European Mortgage Federation warns of the economic risks if people can’t secure homes that protect them from climate change. ā£Energy retrofits can have a positive economic ā¤impact, but they do little to protect againstā¢ stronger storms, rising seas, wildfires, and floods. As governments struggle to cover ādisaster costs, ālenders and insurers ā¢will face increasedā risks.
Relocationā£ and Financial Support
Ultimately, climate changeā¢ may force some people to ārelocate. Burt suggests thatā£ affordable loans might be targeted at thoseā most at risk to help them move to safer areas. Lenders who ācontinueā offering mortgages onā homes destined to succumb to ā¤climate change may soon regret ā¤their decisions.
“If youāre trying to support those markets, youāre throwing good money after bad.”
4 Comments
Could it be that banks are only now realizing climate risk impacts property value?
If banks are taking notice, what’s stopping the rest of the industries?
Who will protect us if even banks are worried about climate impacts on housing!
Basil: Why are banks only now ringing the alarm bell on climate and housing?