When you think about places vulnerable to climate change, the rice paddies of Bangladesh or low-lying islands in the Pacific may come to mind. However, there is another much less expected answer: owning your own home. Approximately one-tenth in value of the planet's residential property is threatened by global warming; among them, many houses far from the coast. From tornadoes ravaging the residential outskirts of the American Midwest to hail the size of tennis balls smashing the roofs of Italian villas, multiple adverse weather conditions driven by greenhouse gas emissions are shaking the foundations of the most important asset classes. of the world.
Potential costs arise from both policies designed to reduce household emissions and climate-related damages. And they are huge. According to one estimate, climate change and the fight to combat it could destroy 9% of the world's housing value by 2050, equivalent to $25 trillion, not far less than the annual GDP of the United States. This is a huge bill that looms over people's lives and the global financial system. And it seems destined to trigger a huge fight to know who should take it on.
Homeowners are one of the candidates. Now, if we look at the current real estate markets, they don't seem to be bearing the costs. Home prices show little sign of adjusting to climate risk. In Miami, the subject of great concern about rising sea levels, they have risen by four-fifths this decade, much more than the American average. Additionally, because the impact of climate change is still uncertain, many homeowners may not have known the risk they were taking when they purchased their homes.
Now, if taxpayers have to pay, they will bail out wealthy homeowners and nullify useful incentives to adapt to the looming threat. Spreading the costs will be difficult for governments; among other things, because they know that voters care a lot about the value of their homes. The bill has three parts: paying for repairs, investing in protection and modifying the houses to limit climate change.
Insurers often foot the bill for repairs after a storm destroys a roof or a fire destroys a property. So, as the weather worsens and natural disasters become more frequent, home insurance will become more expensive. In some places, it could become so expensive as to cause house prices to fall; Some experts warn of a “climate insurance bubble” affecting a third of American households. Governments will have to accept the losses that this imposes on property owners or assume the risks, as is already happening in parts of wildfire-prone California and hurricane-prone Florida. In those two states, the combined exposure of state-backed “insurers of last resort” has risen from $160 billion in 2017 to $633 billion. Local politicians want to shift the risk to the federal government, which actually manages flood insurance today.
Physical damage could be avoided by investing in the protection of the properties themselves or infrastructure. Keeping homes habitable may require air conditioning. In India, few homes have it, despite the country suffering from increasingly intense heat waves. In the Netherlands, a system of dikes, ditches and pumps keeps the country dry; Tokyo has barriers to contain floods. Financing all this investment is the second challenge. Should homeowners unaware that they were in danger pay, for example, for concrete shoring of a subsidized house? Or is it right to protect them from those unexpected and unequally distributed costs? Densely populated coastal cities, those most in need of flood protection, are often the crown jewels of their countries' economies and societies. Just think of London, New York or Shanghai.
The last unknown is how to pay for domestic modifications that prevent further climate change. Homes account for 18% of global energy-related emissions. Many are likely to require heat pumps, which work best with underfloor heating or larger radiators, and thick insulation. Unfortunately, adapting homes is expensive. Asking landlords to pay can provoke a rejection reaction; In Germany, the ruling coalition tried to ban gas boilers last year but had to change its mind when voters objected to the costs. Italy has followed an alternative approach and offered extraordinarily generous, and poorly designed, aid to households carrying out renovations. It has spent a staggering €219 billion (or 10% of its GDP) on its “superbond” plan.
The full impact of climate change is still far from being fully felt. However, the sooner policymakers can resolve these issues, the better. Evidence shows that house prices react to these risks only after the disaster has struck, when it is too late to make preventive investments. Inertia is therefore likely to lead to unpleasant surprises. Housing is too important an asset to be misvalued throughout the economy; above all, because it is vital for the financial system.
The full impact of climate change is still far from being fully felt. However, the sooner policymakers can resolve these issues, the better. Evidence shows that house prices react to these risks only after the disaster has struck, when it is too late to make preventive investments. Inertia is therefore likely to lead to unpleasant surprises. Housing is too important an asset to be misvalued throughout the economy; above all, because it is vital for the financial system.
At the same time, policymakers must take care not to subsidize recklessness by offering large implicit guarantees and explicit state-backed insurance plans. These not only pose an unacceptable risk to taxpayers, but also weaken the incentive for people to invest in strengthening their properties. Furthermore, by eliminating insurance premiums, they do nothing to discourage people from moving to areas that are now known to be high risk. The omens are not good, despite how much is at stake. For decades, governments have failed to discourage construction in flood zones.
The $25 trillion bill will raise issues around the world. However, doing nothing today will only lead to a more painful tomorrow. For both governments and homeowners, the worst response to the housing dilemma would be to ignore it.
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Translation: Juan Gabriel López Guix
