Canada’s housing crisis is well known. There are not enough homes to meet the need for shelter, much less the desire for ownership, and affordability is at an all-time low. The solution seems simple: build more homes. But, as we are seeing, that is not easy and one of the biggest, growing challenges is climate change.
Articles published in The Economist earlier this year address this matter and offer some insights.
Astounding Numbers
Property is the most important asset class in the world. It accounts for two-thirds of global wealth. Mortgages serve as collateral in money markets and support banking balance sheets. The global real estate consultancy Savills, puts the total value of the world’s property at $380 trillion. Its significance was very clearly illustrated by the Global Financial Crisis in 2008.
Now, both “physical” and “transitional” risks could threaten as much as $25trn of that value over the next 25 years, according to modelling produced by Morgan Stanley Capital International (MSCI), which compiles financial indices. Devaluation of that magnitude would reverberate throughout financial markets and national economies.
Physical Risk
Physical risk is probably the easiest to understand. Storms, floods and wildfires are very clear and worsening dangers.
In Europe between 2000 and 2009 there were three storms that generated more than $1 billion in insurance pay-outs. Between 2010 and 2019 there were ten. Since 2020 there have already been six.
There is also more insidious climate related risk. In London, hot dry summers are pulling moisture out of the clay soil that 40% of the city’s homes are built on. As the ground dries out it shrinks causing buildings to shift, in some cases resulting in tens of thousands of dollars in damage. There is a similar problem in Amsterdam afflicting the wooden pilings that support many of the city’s older buildings.
Transitional Risk
Transitional risk comes from government efforts to mitigate the causes and effects of climate change. The costs of these transitions fall to homeowners and taxpayers in general. It is, therefore, fraught with political challenges.
Efforts to reduce greenhouse gas emissions in Germany stand as a cautionary tale. The government moved to ban gas boilers. The uproar from voters over the cost (nearly $23,000 Cdn) forced the government to water down and delay the legislation.
Paying for it
Insurance companies are generally seen to bear the brunt of the expense of physical risk but there are many jurisdictions where governments backstop homeowners that private insurers will not cover. This can distort the market, obscure the severity of risk and artificially support high property values.
A study in the journal Nature suggests that, in the U.S., if the expected losses from flooding alone were taken into account home values would fall by between $121 billion and $237 billion.
Housing is a vital asset and it cannot be mispriced across the economy, particularly because it is so important to the financial system. Governments, and therefore taxpayers, will have make investments in infrastructure to protect property. Owners will have to pay, at least, some of the cost to retrofit their homes to pollute less and that will likely have to involve some inducements to spend the money.