Did you feel the quake? At press time, a 6.0 magnitude earthquake has struck Melbourne and regional Victoria. Many Victorians would have felt the ground shaking this morning. Take a look at this tweet from the Breakfast News.
Speaking of sudden natural events, they can be short-lived such as earthquakes and they can also be of long duration such as floods and bushfires. In many cases, they cause loss of life and massive destruction of property.
Given the world is going to face even more severe weather events in the near future, it can have a whopping big effect on property prices.
Housing markets are vulnerable to climate change
In Australia, it’s expected that more than 250 Australian suburbs could experience property prices fall by 2050 if we ignore climate change, according to the Reserve Bank’s new worst-case scenario modelling.
In particular, coastal stretches of Brisbane and the Gold Coast could become ‘high risk’ investments as well as large portions of metropolitan Sydney, Melbourne and Perth.
Currently, the RBA says about 3.5% of Australian properties are ‘high risk’ and this figure will reach 8% by the end of the century.
How do we determine whether a property is at high risk?
The analysis uses suburb-level data from consultancy group XDI-Climate Valuation which assesses the potential damage brought by climate change-induced events. It also combined that data with the RBA’s in-house loan database and a prediction of global temperatures to rise 4.3 degrees C by 2100. The result: a Value at Risk (VaR) metric which highlights the costs of maintenance, repairs and insurance against the cost of replacing a property entirely.
Much of the coastal regions will be impacted with VaR greater than 0.4% which equates to 10% in property value. Parts of Sydney, Melbourne and Perth are on the path to VaR greater than 0.2%.
In the face of governmental inaction, there will likely be more devastating disasters that lead to higher insurance premiums and higher maintenance costs (VaR). Switch-on buyers would admittedly spend less on high risk properties or may abandon those markets entirely. This is a worrisome problem for investors in those regions.
What does it mean for banks?
“Housing prices could decline, leaving banks with less protection than expected against borrower default,” the RBA states.
Climate change affects banks because of the impact it has on the value of assets used as collateral for loans and the income borrowers use to repay their loans.
Risks manifest into coastal real estate losses, an increase in stranded assets and potential loss of reputation if banks do not support their impacted customers effectively. The mortgage collateral of Australia’s banks may be diluted down to virtual nothingness in those disaster-prone regions.
Some insurers may refuse to cover high risk properties, leaving homeowners and lenders with hefty bills to pay.
“In principle, any [high-risk property] should be able to be insured,” the RBA states.
“But if a large number of insurers increase annual premiums or withdraw their coverage of certain climate-sensitive regions, this may leave households without insurance cover and banks susceptible to borrower defaults.”
What can be done?
The Climate Vulnerability Assessment (CVA) is being completed by Australia’s five largest banks with the design process involving consultation with the participating banks facilitated by the Australian Banking Association. CVA is aligned to APRA’s wider efforts to improve scenario analysis capabilities within the financial sector to strengthen our planning for the potential financial impacts that may be triggered by climate change.
“The considerable uncertainty about the exact magnitude of the impacts from climate change makes it essential that banks further integrate climate risk into their mortgage and business lending processes and report on it to enable external assessment of the risks,” the RBA says.
Source: https://www.businessinsider.com.au/property-prices-climate-change-warning-rba