Property values: Impact and implications
U.S. property values are increasingly affected by severe climate events. Common flood areas — mostly in coastal states like Florida or Texas — face rising insurance costs and declining market values. Properties in these areas were overvalued by $44 billion in 2021, according to the Sierra Club. Actuarial firm Milliman later estimated those properties at $520 billion.
Wildfire-prone regions like California suffer similar impacts. A 2024 study by real estate expert Dr. Hongwei Dong highlighted a correlation between spreading fires and declining home values. According to the report, prices in affected areas dropped by 2.2% following major wildfire events.
Similarly, Canada suffers under escalating climate risks. Coastal areas like British Columbia face rising sea levels and flooding, while inner provinces experience expanding wildfire risks. While Canada’s strict building codes and rules like the National Building Code of Canada (NBC) somewhat address these impacts. However, areas frequently impacted by climate catastrophes — like Fort McMurray — still face considerable property depreciation. For example, wildfires caused a decline in the residential property market in Fort McMurray between October 2022 and October 2023. On average, home prices declined by 16% to $336,000 in October 2022 to $282,000 a year later. Furthermore, average single-family home prices fell to $467,848 in 2023, down from $700,000 ten years prior.
Mortgage lending: Impact and implications
U.S. mortgage lenders contemplate how to integrate physical and transitional climate risk assessments in their lending practices. They may follow programs to approach scenario analysis from key modelers like the Intergovernmental Panel on Climate Change (IPCC), Network for Greening the Financial System (NGFS), and International Energy Agency (IEA). Additionally, supervisory stress testing and regulatory climate-related financial disclosures are becoming an integral part of climate risk treatment and management.
But there’s a caveat to consider. Trump’s recent election may divert resilience efforts by U.S. banks, as he plans to deregulate climate rules imposed by the previous administration.
In high disaster-prone areas, U.S. lenders are applying larger down payments or higher interest rates to counterweigh lower property values and rising default risks.
Eddie Seiler — executive director, Mortgage Bankers Association (MBA) Research Institute for Housing America — explains that “If you are underwriting a 30-year loan on a property at the Outer Banks of North Carolina, which will likely be washed into the ocean in 10 years, it needs to be taken into account very explicitly […] we’re not there yet as an industry”.
Homeowners in such areas struggle to meet mortgage obligations due to catastrophic climate impacts and higher insurance costs. Severe scenarios even lead to homelessness and forced migration. This occurred in areas affected by hurricanes Helene and Milton, leaving homeowners with damaged collaterals and impending defaults. The hurricanes also forced migration due to rising uninsurability as premium prices went up and firms exited affected zones.
Rising flood insurance premiums, exemplified by potential $7000 annual rates in Key Biscayne, are straining Miami homeowners’ ability to make mortgage payments. If unchecked, these compounding effects will escalate damage and loss risks over time, undermining climate risk management efforts. In response, secondary mortgage market entities like Fannie Mae and Freddie Mac are integrating climate risk into their securitization processes. This shift may trigger a broader re-evaluation of mortgage-backed securities (MBS) in climate-vulnerable regions.
| Insights Box: U.S. Presidential election and implications for climate risk integration in property market
Since the presidential election ended with a Republican victory, the industry is nervous over one question: What influence could Trump’s victory have on climate risk integration in the property market? Reversal of key climate policy – A Trump victory means the climate policies implemented by the Biden administration, especially the Inflation Reduction Act, will likely be reversed. This reversal could impact to speed at which climate risk is integrated into the U.S. property market, due to a reduced emphasis on prescriptions regarding climate-resilient infrastructure. This can therefore lead to increased exposure to growing climate-related risks. Regulatory setbacks – Similar to his past undertakings, Trump intends to maximize deregulatory efforts on climate-related and environmental rules. This also means that the property market will lack the incentives and structure needed to adequately prepare for future climate-related events. As a result of disasters and regulatory changes, properties may face higher operating costs. Market decline – The uncertainty around climate policy and regulation could lead to market volatility, impacting property values and investment decisions. Consequences could also extend to other supporting sectors such as insurance with higher premium costs, given that there is a lack of awareness of future risks and a reduced emphasis on climate risk assessment and resilience; and banking with unexpected losses from aggravated mortgage defaults and damaged collateral following climate devastation. Regardless of political leadership, the real estate sector as well as banking and insurance must continue to take proactive actions to accelerate resilience in their business practices against growing threats from extreme weather events, by integrating climate risk in their property portfolios to avoid substantial losses. |
From another angle, Canadian mortgage lenders are actively reevaluating their lending strategies to respond to transparency gaps in the real estate sector. Canadian banks are now developing more nuanced risk assessments for properties in high-risk areas. The Canadian Mortgage and Housing Corporation (CMHC) also recognized climate risks as a key component of its risk management approach. Notably, CMHC’s significant role in the market provides a stabilizing influence, while it also raises concerns about systemic risk implications for the national housing market.
Ultimately, the changing climate significantly affects the U.S. and Canadian property markets. It pushes both countries to rethink how they assess and manage risks. With rising sea levels, wildfires, and severe storms hitting high-risk areas with increasing frequency and severity, there’s a growing need for fresh strategies to keep the real estate market stable. Canada’s regulations are helping build some resilience, and U.S. lenders are beginning to catch up. As climate impacts continue to grow, both countries need to take proactive approaches, not just to protect investments and support homeowners but to avoid broader economic disruptions.
Lukky Ahmed is the CEO of Climate X.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
