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Climate change starts to take its toll on housing market

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Source: publichealthwatch.wordpress.com

Source: publichealthwatch

Money talks; BS walks

If there is one thing Australians can relate to its house prices. There is a lot of coastal real estate.

This research discussed below is, to make a pun, “ground breaking”. It shows how a large sample of people are demonstrating their core climate beliefs in the largest investment decision many of them will ever make.

Politicians can say what they like. Scientists should take huge heart from papers such as this because it shows that property buyers and sellers are listening to them.

In my opinion, the most important work that needs to be done in climate change is showing what its impacts will be on the world. We are long past having to prove that climate change is real and we need to be preparing for next year’s battles and not re-fighting the last war.

I’d like to thank Kate Mackenzie director, finance, policy & decision metrics at Climate-KIC Australia for drawing attention to this paper. Way to go.

“Disaster on the horizon: The price effect of sea level rise”

That’s the title of an SLR paper  published by Bernstein, Gustafson & Lewis. The headline conclusion is that homes exposed to sea level rise [SLR] sell at a 7 per cent discount relative to observable equivalent unexposed properties equidistant from the beach. This discount has grown over time.

I am mostly just going to quote paragraphs, as it is a well written report and the conclusions come through loud and clear.

Our first contribution is to show that properties exposed to projected SLR sell at around a 7% discount relative to otherwise similar properties (e.g. same zip, time, distance to coast, elevation, bedrooms, property and owner type), which we show implies very similar time frames for rising sea levels as the medium to highly pessimistic scientific forecasts. This effect is primarily driven by properties unlikely to be inundated for over half a century, suggesting that it is driven by investors pricing long horizon concerns about SLR costs.

Moreover, the same discount does not exist in rental rates, indicating that this discount is due to expectations of future damage, not current property quality……Finally, we show that the SLR exposure discount has increased substantially over the past decade, coinciding with both increased awareness and more pessimistic prognoses about the extent and speed of rising oceans. In particular, we document increased transaction volume and lower prices for sophisticated buyers following the significant revisions of the IPCC’s 2013 release, which increased SLR projects and awareness

Emphasis added

Comment: An analyst might suggest that a 7 per cent discount is excessive, given the 50-year time horizon. People overvalue the risk.  Still people also overpay on tollroads in the sense that the time saved compared to the toll implies a high value for time and a willingness to pay a premium to avoid inconvenience.

480,000 property sales analysed

Our main test sample contains over 480,000 sales of residential properties within 0.25 miles of the coast between 2007 and 2016. In our baseline analyses, we define any property that would be inundated at highest high tide with a 6 foot global average SLR to be exposed…….

….We further break this into exposure buckets, with properties that will experience ocean encroachment after 1 foot of global average sea level rise trading at a 22%, 2-3 feet at a 17% discount, 4-5 feet at a 9% discount and 6 feet at a 6% discount.4 Using the long run discount rate provided by Giglio et al. (2014) and assuming complete loss at the onset of inundation, we estimate that markets expect 1 foot of sea level rise within 35 years, 2-3 feet within 45 years, 4-5 feet after 65 years, and 6 feet in 80 years. These results are consistent with the medium to high projections provided in Parris et al. (2012) and utilized by the NOAA in their 2012 report.”

Comment: What a fantastic piece of research. Any investment bank research team would win awards for coming up with this evidence.

At the beginning of our sample in 2007 we find no significant difference between the prices of exposed and unexposed properties. By the end of our sample in 2016, exposed non-owner occupied properties are priced approximately 13.5% below comparable unexposed properties.

Read the entire paper if you want more.  

  • Climatemonster

    This will happen around the world and not just because of SLR. I read yesterday of a couple who spent $871000 on a new house 6 days ago, only to see it immolated in California. Here in the UK large numbers of houses are built and are still being built on flood plains, and their value is likely to crash as the likelihood of frequent major flooding permeates public awareness.

    • Hettie

      Dear Rupert has lost his California mansion in the current fires.
      Oh dear. How sad. Never mind.

    • neroden

      Yeah, I located in the Great Lakes region to be free of both drought and flooding. It’s probably the best region for future land value appreciation.

  • Ray Miller

    It is also likely a similar discounting is occurring more widely. With the increasing trend to overheating due to insufficient insulation and inappropriate glazing types as the local climate heat extremes keep on breaking records worldwide.

    • MaxG

      Double-glazed in QLD, and highly insulated… people are laughing… let’s see who is laughing last… 🙂

      • nakedChimp

        It’s a pita to get DG windows up here.
        And prices are north of reasonable anyway..

        • MaxG

          I hear ya… but, there is more to it than $$ saved on heating and cooling… the house design needs to support it too; no point in having double glazed windows performing better than the walls :))
          There is a comfort aspect too…. not feeling the heat or cold near larger openings. Much better sound insulation — which is a negative in my case, as I won’t her the birds etc as much any more.

          • nakedChimp

            I thought about that before.. microphones and a sound system should be able to alleviate the isolation somewhat 😉

  • Hettie

    Think of all those properties on reclaimed land in Sydney’s south eastern suburbs. Sylvania Waters, Gymea Bay, and the Eastern Suburbs; Rushcutters, Double and Rose Bays. The Brisbane Waters canal side developments…..
    Riverside land all round the world.
    So many cities are by the sea, and vulnerable. Not to mention the Netherlands. Scandinavian countries,
    And now we learn that most climate change models have been way too conservative. That the models proven to be most accurate are the ones that have been predicting the most severe change.
    Five minutes to midnight, folks. Better head for the hills.

    • MaxG

      🙂 I am 200m AMSL… doing just fine…

      • Chris Drongers

        Except that those moving out of harms way need new roads, power, water, phones etc. And experience in Australia says that the cost will be heavily subsidised by the taxpayer, including you.

        • MaxG

          My road already exist; am self-reliant with water and grey/black water; make my own power; don’t have/need/want a phone; certainly need to no subsidising.

          • Chris Drongers

            As I suggested, although your road from gate to house is there and likely paid by you, your proportionate contribution the council roads from town to your gate, state roads from town to regional centre and national highways linking centres has been small compared to government payments. Shifting populations will require new services to be built before the existing ones have reached the end of economic life (for roads the foundations as well as the black bit people see, for power lines the easements as well as the wires). Reneweconomy’s article on falls in coastal house values now in the expectations of sea level rise (22% fall in sale price where 1-2 feet of rise is possible within a working life) points to the destruction of sunk cost that we are facing. And need ro replace. And build to more expensive thermal, storm, fire and other ratings.

          • MaxG

            I am also a big picture guy and understand where you are coming from… and agree.
            However, I have given up expressing my thinking in this space, as our dinosaur leaders cannot even deal with job creation, amidst ever increasing automation; tax cuts for the wrong end of town; and above all: I expect another 20 years, selfishly running my own thing and not giving a s***t about what is going to happen.

          • Chris Drongers

            Agree except for the last 20 years bit.
            No gov sense of urgency over future employment/business, no addressing seriously ongoing automation/social equity, no talk of adaptation to locked in climate change. A terrible indictment of our politicians and of we, the voters, for not pressing for something better.
            So sad.

          • nakedChimp

            Unfortunately you have to prepare for tightening land valuations and more neighbors.
            The council in my area lifted property taxes last 12 months by 10% or some such.. got hell by the property owners.
            But I guess we’ll see this more often in future.

          • MaxG

            Where I am sitting it is all 10 acres plus; with council no plans to subdivide, certainly not below 5, as the council would have to lay water… which is too costly given the low number of properties per area….

          • neroden

            But are you secure against the brush fires and heat waves?

          • MaxG

            There is a clearance required to bush land… which we maintain. Have amber protection in form of Standard-spec-ed SS mesh. Tanks, stainless; heat waves as in temperature: no need to care, due to insulation, controlled ventilation, double-glazing, etc. As for cyclones (just to add) we built to NT cyclone standards, incl. cyclone straps, tie-downs, and big washers on roofing, etc.

    • Tim Forcey

      WHAT”S THE MOST CORRECT LANGUAGE? I wouldn’t say climate change models have been “conservative”. I would say climate change models and modellers may have been “optimistic”, or may have “understated potential impacts”, or have tended to describe “best-case not worst-case scenarios”. “Conservative” to me means cautious or concerned with conservation, whereas it appears what we see is the opposite of that. It is not very cautious or conservative (according to my choice of definition) to deny or understate the potential impacts of climate disruption. But mostly I studied engineering at school, not languages…

      • Hettie

        Good point, Tim. In English, many words have a variety of meanings, and “conservative ” is certainly one of those.
        Strictly speaking, it must mean ” preserving the status quo,” or “resistant to change.”
        I think you are right to prefer “cautious” to conservative in this context.
        I find it interesting, bizarre eveb, that it has taken until now for the climate scientists to test the accuracy of the various predition models as they have. Hindsight, of course is a wondrous gift. Why has it taken so long to say, “let’s plug the data from way back into each of these models, and see which of them best predicted the situation we now have.”
        It’s blindingly obvious as a test now that it is in front of us.
        So no more taking the average predictions if all the models. The one that has been the best performer now rules. And we are in far deeper shit than IPCC has ever dared warn us about.
        Most of us take out insurance to protect against catastrophic loss.
        The greatest catastrophe of all has, until very recently, been brushed under the carpet.
        “She’ll be right”
        And not only Australia taking that line, although, as befitting the nation which invented the phrase, we seem to be about the last nation standing by that claim.
        I do wish that language were regarded as a precision tool for communication, just as numbers are precision tools for engineering.

        • nakedChimp

          The problem with that approach is that most people will tune out after 15-20 seconds of you trying to be precise in what you’re trying to say. Drives a relative of mine insane, as he’s very precise and can’t stand hypocrites.

      • neroden

        The phrase I would use is that most climate models have lowballed the risk.

        I’m already in the hills, but in an area projected to get higher rainfall. Great Lakes is a good region to be in. Sorry about the rest of the world…

      • nakedChimp

        Yeah, engineers are the ones I trust the most 😉

    • nakedChimp

      I’m 800m above SL and 50km from the coast.. my biggest problem will be more new neighbors + rising property taxes in the coming decades 🙁
      Well, as long as artificial meat takes off and greenhouse crops are ever more adopted we should have enough space up here I guess.

      At least the loud dirt-bikes will vanish in due course.

  • neroden

    I told people to sell coastal properties 10 years ago. I doubt anyone listened, but it was the right time to sell — the penalty for being flood-prone has appeared in the last 10 years.

    • MaxG

      You can call yourself an early adopter (of the facts as we know them); the diffusion of innovation follows a bell curve, so do lots of other things like seeing a trend / risk / etc. and ‘react’ early. Most people will react when it is too late, why I have no hope that any environmental change will occur in time (before it is too late).