Banks Are Finally Realizing What Climate Change Will Do to Housing
Extreme weather threatens the investment value of many properties, but financing for climate mitigation efforts are only just getting going.
CHRIS BARANIUK
SCIENCE
JUN 17, 2024 6:30 AM
Banks Are Finally Realizing What Climate Change Will Do to Housing
Extreme weather threatens the investment value of many properties, but financing for climate mitigation efforts are only just getting going.
A flooded neighborhood in Crisfield, Maryland on September 24, 2023 after Tropical Storm Ophelia made landfall in North Carolina, producing high winds and heavy rain across the Carolinas, Virginia, Maryland, Delaware, and New Jersey.PHOTOGRAPH: CHIP SOMODEVILLA/GETTY IMAGES
Rising sea levels, biodiversity collapse, extreme weather—these are the grisly horsemen of climate apocalypse. But don’t forget the fretting loan officers. A study published earlier this year found that US mortgage approvals tend to dip following periods of hotter-than-normal weather. For every 1 degree Celsius that temperatures rise above average, approvals fell by nearly 1 percent—and their value by more than 6.5 percent.
Lower consumer demand was only part of the problem, according to the study’s authors. The effect was mostly down to loan officers’ worries about climate change and what it might mean for the assets they were lending against. In other words, climate change was devaluing property before their very eyes.
It’s not just the heat. In May, yet another beachfront house in North Carolina’s Outer Banks tumbled into the angry sea. It’s the sixth home lost along Cape Hatteras National Seashore since 2020. Researchers say lenders are increasingly trying to pass on the risk of mortgaging coastal properties due to calamities like this. Wildfires, hurricanes, and flooding are also impacting other financial services used by homeowners. It’s increasingly difficult to get home insurance in Minnesota, for instance, following extreme hail storms in recent years.
Big money is finally waking up to the fact that climate change is a gigantic problem. Property is the world’s greatest store of wealth, with a total value just shy of $380 trillion. This is four times global GDP. But there’s a new kind of toxic asset emerging in property portfolios. The number of homes in what you might call “subprime” locations is rising and, in some parts of the world, property value—like a crumbing coastline—is at risk of erosion. Lenders are getting noticeably more reluctant to lend against these assets. No wonder. In the Asia-Pacific region, nearly one in 10 properties owned by real estate investment trusts could be at “high risk” of climate-change-related damage—particularly those on seafronts, a report from climate risk consultancy XDI announced in May.
“Some communities are just going to become much more expensive to preserve,” says Dave Burt, founder and CEO of DeltaTerra Capital. “There’s a gravitational pull on the value of those properties.” Some banks are starting to highlight climate risk to borrowers. HSBC’s UK website, for example, has a page about how climate change could affect people’s mortgages. But Burt argues that buyers aren’t always being told about the medium- and long-term risks, nor are they necessarily having the amount they borrow scrutinized in terms of how their home might plummet in value in the coming years.
And yet, plenty of people are still buying US coastal properties, for instance— and paying ever bigger sums for the pleasure. This fuels the common climate-change-denier claim that because “all the billionaires” are still buying coastal properties, climate change must be a hoax. As if, for some people, “billionaire” somehow equates to “prophet” rather than simply “presently wealthy person.”
The banks may be starting to wake up to the financial risks, but it’s worth acknowledging that climate scientists have been sounding the alarm for years. More than a decade ago, Laura Moore, a professor in coastal geomorphology at the University of North Carolina at Chapel Hill, expressed concern about the risks posed to properties built in the Outer Banks. Now, some of those homes are collapsing as storms rapidly reshape the islands.
The worst-affected of these properties happen to be located on a bend in the coastline that is a natural erosion hot spot, but sea-level rise induced by climate change is only likely to hasten the damage, says Moore, and bring it to other coastal locations. “It is already more difficult to insure homes in coastal areas,” she says. “We can expect that to become more and more the case going forward.”
Plus, in locations like the Outer Banks, you can’t just build a seawall to protect vulnerable properties. The Outer Banks are barrier islands whose position and elevation naturally shift over many years as waves move sand from the front to the rear of the islands. Sticking a big wall on the front means that process goes awry. “The interior of the island gets lower and lower over time, relative to sea level, and more susceptible from the backside to flooding,” explains Moore. So, in some places, no amount of engineering will solve the problem—which is what people like Burt are concerned about.
In areas where hardening a home could reduce its exposure to climate-related risks, though, banks have been “pretty slow” to roll out products that might help people pay for solutions, including structural improvements, or defenses against flooding and wildfires, says Burt. But there are signs that the financial industry is gradually moving toward helping homeowners adapt and respond to climate change in other ways.
Lenders have cottoned on to the fact that the energy efficiency of a property has an impact on its value as an asset, for instance. It keeps people’s utility bills low, improving their ability to pay off their mortgage, for example. In the UK, most homes now have a rating that defines the property’s perceived efficiency—A being the highest, G the lowest. This takes into account things like insulation, energy-efficient lighting, and the type of heating system installed. “Banks would love to have A-rated properties,” says Stewart Cummins, a partner at PwC, a consultancy.
Research from the Bank of England suggests people with energy-efficient properties are more likely to keep up with their mortgage payments. Lenders also benefit from a PR and regulatory perspective by reducing the emissions associated with the assets in their portfolios.
