How does climate change affect the real estate market?
The risks associated with climate change and the natural environment are well documented. However, less well-known are the financial impacts of climate change on the real estate property market.
Climate change has been identified as one of the top threats to global and economic security and has wide reaching impacts on the built environment. The increased frequency and severity of extreme weather events is putting upward pressure on insurance premiums and, in some cases, leading to asset depreciation over time.
Around the world, many countries are introducing mandated climate risk disclosures which seek to quantify and manage transitional, physical and liability risks from climate change. Many investment companies now require climate risk due diligence to appraise the current and future value of assets that may be vulnerable to climate change impacts. Furthermore lenders issuing loans on at-risk properties are beginning to account for increased damage costs in serviceability calculations. Assets that tend to be considered high risk are those in areas exposed to flooding, cyclones, wildfires, rising sea levels and coastal erosion.
What are different types of climate risk?
Climate related risks are currently grouped in three broad categories; transition, physical and liability risk. To prepare for future climate scenarios, the real estate sector has increasingly utilised the TCFD’s reporting framework and are beginning to strategically identify climate-related risks and opportunities.
- Transition risks
Transition risks refer to challenges following carbon offsetting and mitigation actions. Manifested through changes in policy, law, technology and consumer market, these risks concern the financial viability of property-related industries in the context of a net-zero economy. Certain building materials and construction methods (such as carbon-heavy mining) may become obsolete, while others (such as solar and renewables) may experience growth.
- Physical risks
Physical risks determine the exposure of property assets to natural disasters and climate change related events, such as; flooding, storms, hurricanes, wildfires and rising sea levels. These risks include direct damage to properties and access to resources (water and power access may be restricted in extreme weather events).
- Liability risks
Liability risk is a newly recognised category of risk and refers to a customer or company seeking legal compensation for losses due to physical or transitional risks relating to climate change. Failure to adequately protect consumers and the environment may induce liability and reputation risks.
How can homeowners reduce their climate risk?
Climate risk can be mitigated through adaptive strategies. The Australian Government has created an online resource of mitigation measures which is accessible online. Generally, as long as the National Construction Codes are fulfilled, developers and homeowners can avoid transitional risks.
Unfortunately for homeowners/buyers there is currently no legal mandate for councils, sellers or agents to disclose physical climate change related risks. Although climate risk data exists, homeowners and developers often don’t freely have access to this information.
However, there are many ways to increase transparency and awareness around climate risk data. Physical Climate Risk Companies like Climate Valuation offer professional engineering-grade physical climate risk analysis on individual properties. We assess the physical risks to properties and provide information on the likely insurance costs and future impact on market value over time. Our comprehensive report also provides detailed information on adaptation opportunities to improve the property’s resilience.
Take home message
Increasing climate literacy allows individual homeowners and homebuyers to understand the impacts of climate change and develop adaptive strategies to protect their assets and invest wisely. Climate Valuation is an independent company that seeks to empower the homeowner and buyers with the information they need to make informed decisions. Using engineering and investment-grade analysis, our range of residential climate risk reports can help you make informed decisions about buying, selling, insuring, and protecting your real estate investment for a climate adjusted future. Visit our website for more information.