6 Impacts of Climate Change on the Real Estate Market
As an investor, you probably should be aware of the impact climate change has on the real estate market.
If an investor is looking for capital appreciation in the long term and cash flow generation in the short term, then real estate is definitely a good investment. Most likely the house you bought 10 years ago is worth more today. However, in the coming years, there’s a new criterion in the game — climate risk.
Extreme weather conditions like drought, hurricanes, floods, scorching heat, and winter storms take a toll on our daily living. During times like these, we need shelter to keep us warm and safe. A good real estate investment must be climate-resilient for it to last decades. At the same time, it should ideally appraise in value.
How Does Climate Change Affect Real Estate?
Higher market value for low-risk areas
Some locations are more vulnerable to the effects of climate change. Remember, location is the main driver of a real estate’s capital appreciation. There is more demand for real estate located in low-risk areas in times of natural disasters. As an investor, you should generally stay away from the following locations:
- Coastal communities that are more at risk of flooding during storm surges
- Low-lying areas that are threatened to be submerged in the coming years due to rising sea levels
- Near rainforests to avoid the risk of uncontrolled wildfires during hot weather
Although some areas are indeed more vulnerable than others, there are still no exemptions to the effects of climate change. Each location poses its kind of climate risk. A climate risk map of the U.S. shows different climate hazards per region:
- California is at risk for wildfires
- States in the Mid-Atlantic, South, and Florida are at risk for floods and hurricanes
- Midwestern states are at risk for extreme heat
- States in the Rocky Mountains, the Southwest, and Texas are at risk of drought
- Alaska and Hawaii are at risk of rising sea levels
Insurify lists down the American housing markets that are most at risk to climate change. On top of the list is Santa Ana, California followed by Hialeah, Florida.
Meanwhile, in Europe, the lowest-risk country is Sweden. The land value in places like Sweden, or in Finland, the U.K., Ireland, and Austria, are the least to be impacted by climate change across Europe. On the other hand, Italy, Spain, and Portugal will be the most impacted by the effects of climate change.
What about the rest of the world? The New York Times has an interactive map showing climate hazards around the world. It shows that every country on Earth has its climate risks. When it comes to finding a real estate investment, there is fierce competition in less vulnerable places. This creates a greater divide — the wealthy securing homes in safer places while the poor are left with cheaper properties in vulnerable areas.
Higher insurance premiums or limited coverage
Insurance companies have long quantified risks to real estate properties. But in this new century and the coming decades, insurance premiums must take climate risks into account. Aside from decreasing market value for real estate properties in vulnerable areas, they can also incur higher insurance premiums, give limited coverage, or worse — not give any coverage at all to high-risk areas.
Home insurance is most commonly associated with risks that damage the properties during fires, earthquakes, and floods. Contrary to fire, earthquakes and floods are not human-induced. The map below shows the history of river floods in Europe from 1960 to 2010. Turkey and Bulgaria seem to have the highest mean annual flood discharge per decade.
Aside from coastal communities, low-lying areas are also more prone to flooding. You can check NASA’s Sea Level Projection Tool to give you insights into the rising sea levels in a specific area. In Venice, Italy, for example, the sea level today is around 0.07 meters. But based on NASA’s projection, it can reach up to 0.68 meters in the year 2100. These maps and projection tools will give insights to investors before they decide on a real estate investment.
With increasing insurance premiums on real estate properties, property taxes will also follow suit. When the demand is low in high-risk areas, the tax base is also shrinking. Hence, municipalities will likely increase property taxes to maintain their communities’ infrastructure.
More stringent financial investigation on debtors
It’s rare for investors to buy properties with spot-on cash. Usually, they use leverage by getting a mortgage plan. Mortgage payments typically last between 10 to 30 years. That’s a long time filled with uncertainties — especially uncertainties related to climate change.
As more of these climate risks occur frequently and more intensely, credit companies will have to consider the borrowers’ financial capability and resilience in the long run concerning climate hazards. This is to avoid real estate owners from defaulting on their loans. Will he be able to bounce back fast financially from a natural disaster? Or is he more prone to default his mortgage payments?
Higher utility costs
Apart from floods and earthquakes, there’s a more persistent need for the real estate market to adapt. That is during hotter summers and colder winters. During these extreme weather conditions, we seek refuge inside our homes or establishments.
In tropical countries, they need air-conditioning units and electric fans. They will also consume more water to help them cool down. In countries experiencing winter, they also consume electricity for heat pumps to work.
Although in polar opposite situations, there is still one unifying consequence — more constraints on the electric grid. And since the world is still trying to ditch coal and petroleum for renewable energy, utility costs will have to increase.
Call for sustainable building systems
But there’s a way to keep the utility costs low while we’re still transitioning to green energy. Real estate investments that focus on using sustainable infrastructure materials and smart engineering design systems will have a forward advantage over the rest. If you’re going to invest in real estate, it’s best to stick with green real estate. Green real estate is all about building sustainable properties that reduce GHG emissions through integrating green technologies.
There are already green building codes that exist. The most widely known green building code in the world is LEED (Leadership and Energy and Environmental Design) by the U.S. Green Building Council. In some parts of the world, sustainable building design enjoy tax incentives. But more importantly, this is forward-thinking because government legislation will soon require all buildings to update old systems to sustainable ones. It’s just a matter of time, which is not too far from now when climate change effects are already felt by vulnerable countries.
The end goal is to achieve energy and water efficiency, among others.
More climate-resilient building design
Lastly, property builders must design establishments that are climate-proof. Financial institutions, like Moody’s and Black Rock, are actively looking into climate-resilient designs for their property acquisitions. While we are trying our best to reverse climate change through shifting to sustainable practices, we also must take defense.
A climate-resilient home has to be made from eco-friendly materials, for starters. Then, it also must employ green technologies such as solar roof panels, for instance. But most of all, it must be designed to withstand strong winds, floods, and earthquakes. This lies in floodproofing the property and ensuring the integrity of the building materials being used.
For example, new designs for homes will be raising the first finished level home above the projected flood levels in the area. Basements will no longer be incorporated in newer designs. Rather, the real estate market will adjust to new construction methods and adapt to technologies.
By the looks of it, the threat of the effects of climate change is steering real estate towards a more competitive market. It’s never too late to invest. But keep in mind that a wise investor makes decisions today while thinking of the future ahead.
