I have been toying with the idea of finally having something of my own rather than paying someone else’s mortgage with my rent.
This seems to make sense from investment point of view and I am inherently interested in the kind of information people need to make smart decisions in this space.
When I have started to look into this, it all seems getting complicated as the string of decisions that one has to make and risks that need to be considered becomes surprisingly long and complex.
Past risk management= future guide?
Proper risk management in the past has been somewhat straight forward when it comes to house hunting: if you find a property that you would like to buy, you could get your hands on historical records (well I would and then again I probably deviate from the norm) whether the area has had flooding and to understand better the past damages from other hazards to the property.
This kind of information on historical flooding is often with local governments and insurance companies and can be used to estimate also risks in the future or at least likelihood that the past floods would repeat in the same location.
Yet, a few examples just these past days show why such risk management based on history might not serve us well in the future.
Just last week, storm winds and heavy rain passed over the state of Tasmania and devastated most of Hobart, the capital.
The damage bill of the “worst storm in decades” is likely to be millions, and the commentary in the news has classified the event as highly unusual and thus unexpected. One of my friends commented on the storm that it was odd as those kinds of storms “just don’t occur in Tasmania”.
Insurance, more frequent events and property values
In Canada, insurance claims have been increasing and there is also the issue of more frequent flooding leading to insurance companies not wanting to give insurance:
“From Halifax to Victoria, we’re seeing growth in the uninsurability of homes,” …People who can’t get insurance because the frequency of flooding is too high.”
This has direct linkages to mortgages and property values: if people’s houses are constantly flooded even several times, the damage costs and higher insurance or loss of insurance could lead to mortgage defaults.
It’s relatively straight forward to make a claim on a flooded basement the first time but if that happens two or three times, it’s likely to get harder. And being hit by multiple events such as bushfires and flooding can mean that insurance premiums go up.
Perhaps households don’t need to make those decisions alone. It is likely that insurers and reinsurers will put in clauses and prices for such areas that they simply do not attract those people who think about long-term investments.
The markets will eventually respond to natural hazards. People could be less likely to be able to get insurance or renew their existing insurance if the frequency of flooding increases significantly in their area and for example highly unusual events become the norm.
In Australia, banks for example have been encouraged to at least examine potential climate risks. And some banks have responded to this. For example, NAB states that “The impacts of climate change and climate-related policy are having a growing effect on our business, our customers, and the communities in which we operate”.
There is a growing recognition among the banks that climate related risks like sea level rise will eventually impact property values.
A new study just in April 2018 from Harvard University and University of Colorado showed how property values on the coastal areas in Miami are gaining value much slower than those on higher elevations.
So what about just normal people?
I would love to end this blog post in a robust set of advice or recommendations on how to invest in a smart way in property even if some of the climate risks eventuate and how to better understand the insurance system and the current mechanisms.
But I’ve only hit on the tiny top of the iceberg here of the kinds of issues that we do not usually think about and am not sure am much wiser yet on how to do so.
I do recognise that someone working in the climate risk space, such risks seem very real and relevant to me when I think about long-term decisions and investing in property. And there is potential I am risk averse above what is required.
Yet at the same time, I have access to information and knowledge in this area and to experts who could have at least some of the answers.
But there are likely many people out there who, even if only occasionally, think about such risks and would like to have consistent information on how increased climate extremes can have impacts on their investments. So who should they turn to?
As long as climate risks are “potential future risk”, it is unlikely that these are factored in decision-making in banks and mortgage decisions, evaluation of property values, or insurance availability.
But once they are, this could mean quite big changes in how such investment decisions are made in the future. This means also a new need to communicate such risks to customers who will be impacted.
If there is anything to go on from the Harvard study, I will not be buying right on the coast next to the beach or on a floodplain. Other than that, I think I just need to pick the risks I can live with and can know about now.
Ps. I am very interested in comparing notes so if you have any ideas/experiences in how you made a decision in this area, please comment even if it’s just to tell me to stop being so risk averse ;).