Climate change could trigger falling property prices in 254 ‘high risk’ Australian suburbs, the Reserve Bank warns

Climate change could trigger falling property prices in 254 ‘high risk’ Australian suburbs, the Reserve Bank warns
  • There are 254 “high risk” suburbs where property values could fall if Australia’s banks ignore accelerating climate change, the Reserve Bank of Australia (RBA) says.
  • In new worst-case scenario modelling, the RBA states a small number of homes exposed to extreme weather could “result in credit losses” for the banks.
  • Brisbane and the Gold Coast could be impacted by 2050, although the vast majority of postcodes will not face the same property value risks.
  • Visit Business Insider Australia’s homepage for more stories.

More than 250 Australian suburbs could see their property prices fall by 2050 if lenders do not take stock of climate change, according to a new analysis by the Reserve Bank of Australia.

In a new bulletin, published Thursday, the reserve bank found coastal stretches of Brisbane and the Gold Coast could become ‘high risk’ investments.

Large portions of metropolitan Sydney, Melbourne, and Perth also face heightened risks, with some regional hotspots also put on alert.

While overall losses are “likely manageable”, the report suggests “a small share of housing in regions most exposed to extreme weather could experience price falls that might subsequently result in credit losses”.

Rising insurance and repair costs a key concern

The analysis uses suburb-level data from consultancy group XDI-Climate Valuation, which assesses the potential damage wrought by climate change-induced bushfires, river floods, coastal inundation, wind storms, and ground subsidence.

The analysis combines that data with the RBA’s in-house loan database, and a disastrous “hothouse world” prediction of global temperatures rising 4.3˚C by 2100.

The result of those inputs: the Value-at-Risk (VaR) metric, which expresses the combined costs of maintenance, repairs, and insurance against the cost of a replacing a property entirely.

“For example, a VaR of 0.5% is equivalent to an annual premium of $2,500 on a building that would cost $500,000 to replace,” the RBA states.

Properties with a VaR of greater than 1% are deemed ‘high risk’, with buyers less inclined to spend big on properties requiring such pricey upkeep.

The RBA states about 3.5% of Australian properties are currently ‘high risk’, growing to 8% of properties by the end of the century.

In the model, that increase is directly linked to climate change.

The thinking goes like this: Unchecked climate change leads to more damaging natural disasters. Natural disasters lead to higher insurance premiums. And higher insurance premiums lead to higher VaR.

And according to the RBA, increasing a property’s VaR by 0.4% equates to a 10% in property value.

In its modelling, some 254 Australian suburbs are likely to face a VaR increase of 0.4 by 2050.

While that is a minuscule proportion of Australia’s total postcodes, the data suggests prices would be impacted in built-up coastal regions.

Much of Brisbane and the Gold Coast face VaR hikes of greater than 0.4%, with large tracts of Sydney, Melbourne, and Perth in line for increases of greater than 0.2%.

via RBA

Banks on high alert to climate risks

That’s certainly a problem for investors in hotspot regions, hoping for decades of unbridled growth in property values.

But to the RBA, it could be a concern for Australia’s banks.

If left unchecked, much of their mortgage collateral — the value of the actual property being mortgaged — could evaporate in those hotspot regions.

“If current values do not fully reflect the longer-term risks of climate change, housing prices could decline, leaving banks with less protection than expected against borrower default,” the RBA states.

Climate change may also drive down incomes for some workers, further reducing the serviceability of large home loans.

And switched-on homebuyers, who understand the long-term climate risks, could abandon those markets entirely, accelerating the property price collapse.

The prognosis is even worse when making the worst-case assumption that some insurers may become unwilling or unable to cover high-risk properties, leaving homeowners (and their lenders) on the hook for hundreds of thousands of dollars in damages.

“In principle, any [high-risk property] should be able to be insured,” the RBA states.

“But if a large number of insurers increase annual premiums or withdraw their coverage of certain climate-sensitive regions, this may leave households without insurance cover and banks susceptible to borrower defaults.”

The RBA admits some limitations to its study, most prominently the assumption that banks will not adjust their exposure to high-risk suburbs as time goes on.

The big five banks are already working with the Australian Prudential Regulation Authority on a climate vulnerability assessment, providing a framework for lenders to assess their exposure to climate risks moving forward.

“The considerable uncertainty about the exact magnitude of the impacts from climate change makes it essential that banks further integrate climate risk into their mortgage and business lending processes and report on it to enable external assessment of the risks,” the RBA says.

“On the other hand, the risks to bank portfolios may be understated by other factors”, the bulletin states.

“For example, we implicitly assume rents are unaffected by climate change, but there may be less demand to rent houses that are at risk of damage.”