Climate Change and Property Values
The Financial Awakening
Rising sea levels, biodiversity collapse, and extreme weather are not the only concerns of climate change. Financial institutions are also starting to recognize the massive problem it poses. Property, valued at nearly $380 trillion globally, is the world’s largest store of wealth. However, a new type of toxic asset is emerging in property portfolios, particularly in areas vulnerable to climate change. Lenders are becoming increasingly reluctant to lend against these risky assets.
High-Risk Properties
In the Asia-Pacific region, nearly one in ten properties owned by real estate investment trusts could be at “high risk” of climate-change-related damage, especially those on seafronts, according to a report from climate risk consultancy XDI. Dave Burt, founder and CEO of DeltaTerra Capital, notes,
“Some communities are just going to become much more expensive to preserve.”
Banks like HSBC are starting to highlight climate risks to borrowers, but Burt argues that buyers aren’t always informed about the long-term risks or the potential devaluation of 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 coastal properties, climate change must be a hoax. However, this perspective overlooks the long-term risks and the potential for significant property devaluation.
Scientific Warnings 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 Chapel Hill, expressed concerns over a decade ago about properties in the Outer Banks. Now, some of these homes are collapsing due to storms reshaping the islands. Moore explains that sea-level rise will only hasten the damage, making it increasingly difficult to insure homes in coastal areas.
Engineering Limitations
In places like the Outer Banks, building seawalls is not a viable solution. These barrier islands naturally shift over time, and seawalls can disrupt this process, making the interior of the island more susceptible to flooding. Burt and others are concerned that no amount of engineering will solve these problems in certain areas.
Financial Industry’s Response
Slow Adaptation
Banks have been slow to offer products that help homeowners reduce climate-related risks. However, there are signs of gradual movement towards helping homeowners adapt. Lenders are recognizing that energy efficiency impacts property value. In the UK, homes are rated for energy efficiency, and banks prefer properties with higher ratings.
Green Mortgages
Research from the Bank of England suggests that people with energy-efficient properties are more likely to keep up with their mortgage payments. This has led to the rise of “green mortgages” or “energy-efficient mortgages,” which offer better interest rates or cash-back bonuses 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 that, they are protecting their customers.”
Clean Energy Investments
Clean energy firms are benefiting from this shift. Aira, a Swedish firm, recently secured a €200 million deal with BNP Paribas to allow customers in Germany to pay for heat pumps in installments. Eirik Winter, BNP Paribas’ CEO in the 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. Energy retrofits can have a positive economic impact, but they do little to protect against stronger storms, rising seas, wildfires, and floods. As governments struggle to cover disaster costs, lenders and insurers will face increased risks.
Relocation and Financial Support
Ultimately, climate change may force some people to relocate. Burt suggests that affordable loans might be targeted at those most at risk to help them move to safer areas. Lenders who continue offering mortgages on homes destined to succumb to climate change may soon regret their decisions.
“If you’re trying to support those markets, you’re 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?