Will your home be swept away by climate change?

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Guest post from Kate Mackenzie, former FTAlphaville doyen and Climate Institute senior researcher.

Most of you will probably feel there’s already enough to worry about in Australian housing without bringing climate change into it. We are a country that is heavily invested in housing, from households to the macro-economy. But we are also particularly exposed to various effects of climate change. It seems logical to consider the implications.

So, how much housing is at risk from climate change?

It’s difficult to say precisely: housing is by nature diffuse and distributed and irregular. Anyone in home insurance will tell you that you can have two houses next door to each other with different risk profiles, depending on the building materials, the land elevation and other characteristics. Once the probabilistic risks of natural hazards are added — even on historical basis — it gets more complicated. Then, there is the increase in exposure — that is, the growth of housing stock itself, often in coastal areas. When climate change is added it becomes more complex still.

However some attempts have been made. Most frequently you’ll hear this paper cited, a federally-funded study in 2009 looking at risks to housing out to 2100. It defined coastal impacts fairly narrowly, and limited its estimates of costs to replacement cost of the dwellings, finding that up to $63bn worth of housing is at risk. We raised this by 40 per cent to reflect the increase in nominal value of total housing stock since 2009, according to the national accounts, to get a figure of $88bn in 2015. That will still likely be conservative for various reasons explained in our paper:

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[…] the report describes a “relatively simple ‘bucket fill’ approach”. Much more advanced and geographically granular modelling can now be carried out.

Thirdly, it does not include riverine flooding, or indeed any other natural perils such as bushfire or heatwaves which may damage homes now or in the future.

Fourthly, it does not include localised storm surge modelling for some states (notably, Queensland). The report also does not incorporate seawalls and levees, which may reduce the value at risk estimates, but is unlikely to be enough to offset the other factors listed here.

Finally, we note that the First Pass Assessment calculates the value at risk based on the replacement value of the structures themselves.

The really astonishing thing is that little has been done to ensure that new residential buildings are adequately protected from these risks. This 2014 paper from the Local Government Law Journal describes how in Queensland, state-wide guidelines on coastal developments were developed to take account of sea-level rise… and then effectively unwound.

If you are wondering whether developers would want to build in exposed areas, or why local governments would allow them to, here is a story from The Courier-Mail in 2013 about a development proposed in a Gold Coast flood plain:

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RESIDENTS of a proposed Gold Coast development on a cow paddock may be told to “man the lifeboats” and prepare to abandon their homes in a flood.

The development, on the Carrara floodplain, has caused considerable pain to city councillors who say they have no choice but to approve the almost 1000-dwelling project because a legal precedent has been set.

So, to ensure residents’ safety, the developer will have to stock up on drinking water and non-perishable food to cater for 80 per cent of the residents for three days and provide two lifeboats and a flood-free helipad.

Almost 18 months later, there was still appetite to go ahead with the development:

Orient Central Development Corporation has planned up to 10 buildings as high as 19 storeys on the corner of Gooding Drive and Robina Parkway, up from the 970-unit project that gained preliminary approval from the Gold Coast City Council in mid-2013.

Back then, councillors told the developer to include two boat skippers, warning lights, food rations for three days to ensure residents’ safety on the floodplain — and the Gold Coast Bulletin was last night told those conditions would remain.

Cr Bob La Castra, whose division is also home to two other planned high-density city-style developments, said he was concerned about flooding on the site.

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The story goes on to say there are other developments proposed in these floodplains. It all begs the question: who will buy and who will live in these developments? Who will insure them, and at what price?

Insurance is often where it’s first noticed — just see North Queensland. There, home insurance premiums rose rapidly since the mid-2000s, mostly due to cyclone risk. Some complained their premiums had risen as much as fivefold and left them unable to afford insurance.

Many of these people were, understandably, ropable. They complained to their local news outlets and their elected representatives. A review was carried out by the Australian Government Actuary, which found that residents in the far North did indeed pay much more than their more southern counterparts, and that premiums had indeed risen quickly over the past few years — 80 per cent in the eight years since 2005-06.

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But were they being “gouged” by unscrupulous insurers? It seems unlikely, as the AGA also found that over that same period, insurers had been paying out more and more money due to cyclone damage — they estimated $1.40 was paid out for every $1 they’d received in premiums.

These days, “risk-based” premium pricing prevails, and insurers can estimate risk levels on an address-by-address basis. So a home in a cyclone-prone area will be seen as more at risk than a southern residence. A home that is built prior to 1982 changes in building codes will likely be exposed to more serious damage if a cyclone does hit. And a home that is low-lying will be more exposed to storm surges. On it goes.

North Queensland isn’t necessarily an example of climate change impacts. The fingerprint of climate change is hard to detect in cyclone activity, and it’s also likely a combination of an unusual lull in severe cyclone activity in the 1990s and early 2000s had coincided with a shift in the way insurers calculate premiums for home cover.

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But we know enough about climate change to appreciate that cyclone damage will probably worsen and may even move further south. Meanwhile, other hazards such as coastal erosion, intense rainfall and storm surges are all likely to increase in severity over the coming decades. You’d think, then, at the very least, we’d avoid building more vulnerable housing in vulnerable areas. But a messy interaction of local, state and federal government policies and funding models have actually served to encourage more risky buildings, as demonstrated by the Carrara example.

Townsville is another example. A little-known study by engineers conducted in 2012 and released last year identified 4,400 houses at risk of the effects of sea-level rise by 2100. A long way off, for sure — but the report also found that measures to protect that housing would need to be deployed by 2027 in some areas. Who will pay for that? Perhaps more worryingly, they concluded that some areas weren’t worth saving. That is just one view, but there’s little discussion of this.

BANKS

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Our paper has a lot of recommendations concerning banks. We found that banks had, generally speaking, been fairly quiet on the climate risk to housing.

Insurers, meanwhile, have been relatively outspoken (even if they’ve mostly been reluctant to mention “climate change” and have preferred to stick with politically safer terms such as “natural perils”). Individual insurers, the industry association, and cross-business alliances have weighed in with their own advocacy and contributions to policy reviews.

We wondered: where is the self-interest in all of this? Insurers were partly getting exercised about the issue because they were the targets of public outrage — people were angry about their premiums increasing, especially if they hadn’t actually experienced any natural perils themselves. So for insurers, the PR was not good at all. But as a business, insurers have an in-built protection measure in that they only expose themselves for 12 months at a time. Banks are exposed to default risk for, in theory, up to 25 years.

If a mortgagor is under-insured, or uninsured, the banks wouldn’t even know unless the mortgage was less than 12 months old. Banks will demand proof of home insurance when granting a mortgage, and they make it a condition of the mortgage. But they don’t check, after the first year, whether the mortgagor is keeping up their insurance — or whether it’s adequate level of coverage.

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There are plenty of mitigating factors for the banks of course, and we tease these out in some detail in the paper (see Part 5). However advances in technology are making it increasingly possible to estimate future risks — for the public (check out the public beta for coastalrisk.com.au, or the limited-beta for climatevaluation.com). Have the banks measured this risk? Do we know that it’s not material? How does it factor into their lending decisions?

The big question is, if banks or homeowners lose out due to increasingly severe weather events, who pays?

Read the full report here.

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Edit: If any of you have any questions, Kate has kindly offered to join the thread today for Q&A.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.