Melanie Hearse - 20 Feb, 2020

How is climate change affecting property investment?

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As climate change and the increasing extreme weather events continue to be hotly debated, science backed analyses state climate change will render one in 19 properties uninsurable – and therefore unsellable by the end of this decade?

The recent bushfires have caused a global outcry around how Australia is handling environmental concerns, from mining practices to rising sea levels. For those in the investment property market, these issues may be more relevant than they realise – global investment manager Heitman, who analyses the most investable destinations in the world, recently released a report showing two Australian states have fallen from their top ten rankings for the first time, courtesy of years of natural disasters and the resulting massive destruction.

Likewise, the Climate Council recently released a report predicting the value of Australian property will fall dramatically unless urgent steps are taken to address climate change.

Climate risk expert and author of the report, Dr Karl Mallon, says a whopping $571 billion in value could be wiped off the property market by 2030 – rising to $611 billion by 2050 and an eye watering $770 billion by 2100, all thanks to the effects of climate change and extreme weather.

These predictions are based on the largest analysis of property risk due to climate change ever undertaken in Australia, using the latest data from Aussie universities.

How does climate change impact the value of an investment property?

While losing income due to damage costs (including your property becoming unliveable for any amount of time) obviously hit the hip pocket, the death knell for many affected properties is the skyrocketing insurance costs in our near future.

How is climate change affecting property investment?

Dr Mallon says Aussies with property in climate change affected areas will increasingly struggle to pay for home insurance. “Some Australians will be catastrophically affected by climate change. Low-lying properties near rivers and coastlines are particularly at risk,” he says.

How so? General insurance currently does not cover damage from coastal inundation and erosion – both events which are likely to become more common because of climate change, meaning increased premiums to cover the cost of insuring potentially affected properties.

Related: Everything you need to know about home and contents insurance

Based on current trends, these climate change related expenses are likely to impact one in every 19 property owners per year by 2030 (this figure increases to one in 15 by 2100), who will face insurance premiums which will be effectively unaffordable – costing one percent of the property’s value.

If your home is deemed at risk and you decide to insure against said damage, a home worth $500,000 for example, would cost an additional $5,000 dollars every year. This is in addition to the cost of insuring against contents, consequential losses, and normal insurance items like house fires and burglary.

Should you invest in an area tipped to be affected by climate change?

It’s not necessarily a no, but it requires careful consideration, says Jack Henderson, Head of Investment at Trelease Associates.

“At the end of the day, we can’t predict everything in life and an area that could potentially experience climate change related property damage may never do so, and vice versa. And when you consider many of the same properties pegged most at risk of climate change related damage are also highly desirable – coastal properties are generally a great investment, for example, it warrants careful consideration.”

For Henderson, coming to a decision means researching the cost of insuring against potential events versus a calculated look at the likelihood of said event (for example, soil erosion) happening and determining if it is worth paying the larger premiums or not.

“I would then calculate if the return on investment figures stack up in either scenario – and if, for example, you were tenantless for a sustained period of time if any damage did occur.”

How is climate change affecting property investment?

He also recommends plumping for an investment property lenders like.

“When it comes time to sell, potential buyers are likely requiring finance through a lender, and if they can’t get it because the property is considered too high risk, or uninsurable, you have no sale. In short, if you are having trouble finding a lender to purchase the property, assume future buyers will too.”

Related: How to refinance your mortgage to buy an investment property

He also suggests being cautious with properties where the lender requires a low loan to value ratio (LVR) because the property is deemed higher risk as it will lower the pool of potential buyers down the track – not everyone can afford a sizable deposit.

Not sure if the property you are considering is considered high risk? There is a free Beta version of Climate Valuation currently being tested online, which provides a handy calculation as to how predicted sea level rises are likely to impact on the value of a property over a 30-year mortgage term. The future commercial version of the system will also include risks from floods, bushfires, soil subsidence and windstorms. 

Words by Melanie Hearse

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