As the world grapples with the consequences of climate change, a pressing concern has emerged for homeowners and property investors alike: how do rising temperatures, intensifying natural disasters, and shifting weather patterns affect property values?
In recent years, the discourse surrounding climate change has shifted from a hypothetical problem for the future to a stark, unwavering reality. As extreme weather events like Hurricane Dorian and the Australia bushfires have made headlines, homeowners, investors, and policymakers are now facing a daunting question: what does climate change mean for the value of the properties we own and rely on?
Hurricane Dorian, a Category 5 behemoth, ravaged the Bahamas in 2019. With winds reaching sustained speeds of 185 miles per hour and storm surges that swallowed homes and businesses, the region suffered catastrophic damage. While rebuilding efforts are underway, Dorian marked a somber moment that highlights an uneasy new reality. Destruction wrought by natural catastrophes no longer solely imperils the financial situations of hard-hit property owners; it now irreparably alters the underlying value of real estate itself.
The reasons are clear: Extreme climate change-induced weather events increase operating costs for property owners. Imagine going from spending $1,500 monthly on home insurance to upwards of $4,000 on a newly-minted special, coastal-storm-related policy rider, which tacks on even more premiums. Higher premiums essentially make holding certain properties more expensive.
With operating costs already increasing, if these costs significantly rise, properties are inherently worth less. No investor or homeowner wants to risk a substantial portion of their finances by investing in a property that consistently drains their bank account.
Many recent scientific studies have emphasized how warming global temperatures exacerbate the frequency, severity, and length of extreme weather events. By considering data gleaned from past property losses as well as statistical predictions for impending disasters like future hurricanes or sea-level rise threats, and quantifying such risks, homeowners can begin to fathom climate change’s vast implications for their livelihood. And according to the data, the long-term financial outlook for many property owners isn’t particularly rosy.
More expensive climate-related risk premiums and real estate purchase prices naturally mean more expensive debt servicing. Taking on large mortgages only increases property purchasers’ financial outlays. Increased financial burdens then decrease buyers’ immediate standard of living and prevent long-term wealth-building. Research by Boston University revealed that approximately 1.15 million residential, currently-sea-level-flood-prone properties, valued around $183 billion, face projected future insolvency by the year 2051. Insolvency means the properties will become either impossible to insure or far too expensive to maintain as premiums for homes rise dramatically.
In light of such an unpleasant outcome, authorities have formed the Federal Home Loan Mortgage Corporation (‘Freddie Mac’). As of 2019, Freddie Mac executives publicly acknowledged that as oceanic ‘sea level rises’, there is heightened risk that ‘severe’ scenarios of associated financial loss will be compounded onto homeowners’ personal economic standing.
As financial stakeholders, potential property buyers have an economic responsibility to determine whether sea-level rise projected threat zones hold latent long-term value destruction power.
To grasp climate change’s increasing threat on society, many members of regulatory agencies focus on highlighting changes through statistical algorithms charting ‘higher variance’ market uncertainty trends that bring on associated ‘macro’ market losses when unmonitored.
Consider an alternative, then: consider living near low-lying coastlines but with properties engineered to safeguard from projected climate-related risks, perhaps requiring home redesign, local government funded land reclamation to prevent sea level invasions, as well as putting home insurance levies aside in private investment funds.
By focusing on these engineered, climate-resilient properties, prospective investors are better equipped to predict, calculate and handle the impact climate change will assuredly unleash in major property markets.
Homebuyers, as well as investors in the residential real estate sector, face considerable climate uncertainty. Home value losses suffered through catastrophic phenomena might necessitate economic re-alignments by the investment community and indeed even proactive steps to preserve โ and save, the climate- resilient residential asset class.
