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How can Climate Change Affect the Real Estate Market?

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How can climate change affect the real estate market?

One of the problems and challenges across Australia and even the whole world is the fight against climate change. No matter how resilient the country is, it doesn’t change the fact that the country is vulnerable to climate change risks. Continuous innovation and urbanization may both be the solution and the complication when dealing with climate change and global warming.

So, what’s the connection between climate change and the real estate market? There are two types of risks when it comes to investment; the risk that is within an investor’s control, and the risk that is not within an investor’s control. Markets are controlled by man, there can be predictions made to avoid risks thus there aren’t any insurance policies that could cover investments that are failing or already ruined. However, there is something called ‘Acts of God Insurance’ which is insurance that covers natural events and damages caused outside the influence of man.

Global warming and climate change creates a bigger risk to investment properties because the cost for insurance premiums is rising, but that doesn’t guarantee the safety of your investment property. Even with insurance, the costs of the damage after any weather event will always depend on the severity of the situation. How much is covered by the insurance for the repair and the upkeep of the property. Rather than continue investing on a property that is located in an unsafe area, it is best to invest on a property with little to almost no weather risk for long-term ventures.

What is there to learn about Australia as an ‘Uninsurable Nation’?

The Climate Council of Australia Ltd issued a report that discusses the diverse effects of climate change on different parts of the country. There is no domain in Australia that is free from the influence of abnormal weather conditions. The report “Uninsurable Nation: Australia’s Most Climate Vulnerable Places” identifies that by 2030 certain parts of Australia would have mild to moderate climate risks, other parts would have moderate to severe climate risks whereas the rest would be prone to climate extreme risks. But what more can be known from this information?

1. As extreme weather events worsen over time, insurance coverage needs to be modified and the cost for insurance is becoming unaffordable.

Although land value increases over time, the health of the land is at risk as extreme weather events not only put a toll on life forms, but also plant life and inanimate objects. The increasing intensity of heavy rain, flash floods, severe droughts, heatwaves, and frequent fire weather are dangers that could only be prevented if climate risk reduction is also invested on. There are home and property insurances, however, most investors could not afford them or chose not to apply for them. Short-term property investors would opt not to apply their investment properties for insurance since they believe they can sell the property before any major disaster could struck the area. It is advisable that short-term and long-term property investors must at least have one type of insurance because no one can predict calamities, nor can they fully anticipate the damages that can be done to their properties.

2. Property investment or owning property plus climate risks may be unaffordable and can’t be covered through simple insurances. In the worst-case scenario, areas could become uninhabitable.

Based on the general data on “Uninsurable Nation”, top ten federal electorates at most climate risk was listed. The most at-risk federal electorate is Nicholls (Vic) as followed by Richmond (NSW), Maranoa (Qld), Moncrief (Qld), Wright (Qld), Brisbane (Qld), Griffith (Qld), Indi (Vic), Page (NSW), and Hindmarsh (SA). The report classified the amount of risk due to the presence of these hazards that could affect the built environment. This means that the risk is measured based on hazards that can weaken the structural integrity of the building. For the case of these ten electorates, 15% of properties (around 1 in every 7 properties) will be uninsurable within the next ten years. The overall percentage of properties in each state and territory that will be functionally uninsurable by 2030 is as follows: 1.3% in the Australian Capital Territory, 2% in Tasmania, 2.4% in Western Australia, 2.5% in the Northern Territory, 2.6% in Victoria, 3.2% in South Australia, 3.3% in NSW, and 6.5% in Queensland. Not all of the state and territory is under uninsurable risk, but it is for the properties that are relatively close to climate risks that must be looked out for.

Check out “How to Use Demographics Data for Research in the Property Market

3. The level of property investment needs to be fortified not only within the land owned, but also to its surrounding environment.

The expanse of severe weather events does not simply affect one property, but it can ravage a large range of area. Rainfall occurrences in Australia are expected to increase in intensity and extremity. Riverine flooding is responsible for the majority of the risk to properties in the top ten riskiest federal electorates in 2030. 80% of the properties categorized as uninsurable by 2030 are at risk of riverine floods. Other main risks affecting ‘high climate risk’ properties in 2030 include bushfires and surface water flooding. When it comes to natural disasters, Australia is woefully unprepared. There is a need to address the cause of severe weather conditions, which is climate change. Even though it’s good to invest on a property with low climate risk and to apply for insurance, it also better to get involved in community campaigns that strive to combat climate change through efforts done for the welfare of the public realm.

How to invest on a property that can be vulnerable to climate change? How to invest on a property market inside climate vulnerable areas?

It is easy to invest in a property even though it has additional climate risk. However, it’s hard to keep the satisfaction level of your tenant in regard to the aftermath of certain weather events. The responsibility of the investor is to restore their investment property into working condition no matter what happens to it. A setback such as this must not hinder your property’s capability to earn back the damage costs of weather events.

The problem is that even though an area is climate vulnerable, it doesn’t stop civilization to develop and expand in that area. Most home-owners and tenants stay in their properties even after undergoing extreme weather events. Unless their safety is under major jeopardy they won’t move out of their properties if they can still manage, like maintaining their lifestyles and the upkeep of their properties. Sometimes, it isn’t easy to immediately relocate homes because of many other factors that influence the buying or renting process of such a property.

But how can you protect your current property investment from major losses and how can you guarantee your future property investments?

1. Property Building Standards

Buying an investment property doesn’t technically require physical and site survey of the property. Some investors wouldn’t want to take interstate trips to check on the conditions of the property. The details and digital images concerning properties for sale are easily attainable with the development of websites, apps, and social media.

For long term benefits, there is a need to be meticulous when it comes to the details of the property’s building standards in regard to investing on a property that can be ready for climate change risks. As mentioned earlier, the chances of flooding in areas are rather high and there may be possibilities of fire weather. All houses are built differently, the differences of house style and construction is very discernable especially when you compare developers. There may also be different techniques real estate developers manifest to attract buyers and even sellers. Thus, examination of the building’s specifications like the materials used and its construction quality may be necessary.

Check out “How to Control Emotions when Buying an Investment Property

Can the property be sustainable enough to satisfy questions like: will the property still be in good working condition (1) even after reaching a certain height of flooding or (2) even after undergoing a spike in heat and temperature from the fire weather? Remember that you are preparing yourself for a long-lasting property investment. It isn’t cheap to have property that is resilient in terms of financial and climate change terms. However, it is a good sign if the property investment can rely on itself after undergoing tough times and it wouldn’t need major renovations or high maintenance after severe weather events.

2. Property Insurances

Even though it’s costly applying for home insurances and acts of God insurances, they can lower risks especially the damage cost of future events. It would be hard to decide which home insurance is the best for the property investment, but before anything else it would be better to decipher what are the possible threats to the property in order to choose an insurance that can cover those specific types of threats. Different agencies have special offers for insurances that can cater to the investor’s needs, their preferred price point and the property’s requirements. There are also insurances that are already fixed and may not exactly cater to the investor’s demands, however the coverage of these insurance would be much broader and may consider most unlikely circumstances to happen to the property.

To understand which insurance would fit your property investment, formulate questions that can help in your decision making. If you’re in a tight budget, ask yourself this: if you can only apply for one insurance at the meantime, what climate threat is the most common in the area of the property or which climate threat can create the greatest damage to the property? Also consider insurance offers that are able to give you the opportunity to upgrade the insurance coverage in the future so that the insurance can eventually safeguard your investment property of any other climate risks.

3. Suburb Community Investment

Combating climate change is a community effort since climate change affects everyone equally yet each experience is different. There is no full proof plan that can counter climate change and global warming, however there are initiatives and innovations that are implemented by cities, towns, and communities. Community investment is one of the approach to some of the Sustainable Development Goals (SDGs).

How does community investment affect your property investment? Relatively speaking, the problem of one can be the problem of all. Even if you bought a property that’s relatively on a higher position in a sloping zone, that doesn’t mean that the property is entirely free from flood. Can you guarantee that the roads leading in and out of your property is free from flood as well? If the property is just as stranded as the other properties, then it may be beneficial to coordinate a community effort to prevent severe flooding in the area.

The suburban ecosystem is under stress as a result of ongoing land use conversion as well as severe weather events such as rising droughts, heatwaves, bushfires, and high precipitation events. One possible way to improve the general health of the natural and built environment is through establishing the functions of energy and water supplies of the local area. Investing in risk mitigation and resilience decreases loss and suffering, lowers disaster costs, and provides potential economic and social gains even when climate risks do not emerge.

Reference: Nicki Hutley, Dr Annika Dean, Nathan Hart and Jordie Daley. Uninsurable Nation: Australia’s most climate vulnerable places. The Climate Council of Australia Ltd.

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