Australia's housing market at risk due to climate change

Australia's housing market at risk due to climate change

Why is the Australian real estate market at risk due to hot spots in the RBA says?

Some property in parts of Australia exposed to climate change and wild weather could experience valuation declines that leave lenders with less protection in the event of a default, according to Reserve Bank research.

About 3.5% of dwellings in Australia fall under an RBA projection of being at high risk for climate damage, according to the economists Kellie Bellrose, David Norman and Michelle Royters in a research paper.

The RBA economists note that it is the rise in climate risk that isn t yet reflected in property prices that is crucial when considering the Bank exposures in climate-sensitive regions.

The problem is acute in Australia, the world s driest inhabited continent, as mortgages account for about two-thirds of major banks portfolios according to the research.

Climate change creates risks for the Australian financial system that will erode over time to become substantial if they are not properly managed, they wrote. If current values do not fully reflect the long-term risks of climate change, housing prices could decline, leaving banks with less protection than anticipated against borrowers defaulting. In order to estimate possible climate change impact on mortgage books the researchers translated predicted falls in housing prices in climate-sensitive suburbs by 2050 into an implied shift in borrower leverage as measured by loan-to-value ratios.

The result suggest climate change will result in around 400,000 more loans, or 2.5% of all loans, having a loan-to-value ratio greater than 80%. Within this, around half rise to more than 90%.

Classifying a dwelling as high risk is based on the so called value at risk - i.e. the anticipated annual cost of climate-related damage relative to replacement costs of dwellings exceeding 1%.

A VaR change of 0.4 percentage point is equivalent to about a 10% decline in housing prices due to climate risk, according to the paper. Increases in property premium costs would be incurred every year and could therefore result in sizable declines in the value of property. Under a different methodology used as a cross check, the regions predicted to see the biggest increase in the proportion of properties as high risk out to 2050 include populous areas in southeastern New South Wales and northern Queensland, which have a large number of houses at risk of coastal inundation

The authors acknowledged limitations to this method. The risks to banks may be overstated in this exercise because we assume that banks exposures will not change in the future, although banks are expected to consider climate risk into their lending decisions.