Resale value of your home at potential risk if climate change worsens
Buying property is a long-term home loan commitment of 20-30 years, so when searching for a home you need to keep in mind its resale value down the line. If you don’t, you may run the risk of losing thousands of dollars.
A recent Reserve Bank Australia report estimated that 254 suburbs are at high risk of decreasing in value due to extreme bad weather caused by climate change.This will likely affect banks physical mortgage portfolios by 2050.
Many of these high risk areas are in big portions of metropolitan Sydney, Melbourne and Perth, with several regional hotspots.
“A small share of housing in regions most exposed to extreme weather could experience price falls that might subsequently result in credit losses,” says the RBA report.
What damages property value?
The location of your property matters. A home near bushland which is at high risk of bushfires is usually seen as less valuable than those away from the bush.
And with rising global temperatures, the likelihood of extreme weather events and emergency situations will increase. The Australian fires of 2020 might have seemed like a one time deal, but those types of extreme fires have been happening across the globe in the last 12 months, and this is alarming. Take places like California, Italy, Spain and Germany which have all been hit with extreme weather catastrophes and people have lost their homes.
Having a property near areas prone to climate disasters might turn off potential customers. After all who would want to live in an area with the constant fear of losing their home to a fire? This hesitancy could see the value of a home (even if it is state of the art!) depreciate in value over the years.
The RBA says: “The price of properties considered to be at ‘high risk’ of being affected by climate events could decline sharply and banks could experience significant credit losses if borrowers default.”
When buying a home, you need to not only think of the now, but also 10 to 20 years down the road. If you buy a $800,000 home, in later years you’d hope to sell for more than your purchase price. However, if your property is in one of the high risk suburbs there may be a chance that you’ll find your home being worth less than it originally was. That is considering that you didn’t lose your home to a climate disaster.
Cost concerns with worsening climate crisis
In 2020, the Insurance Council of Australia said that there were over $5 million in insurance claims due to the 2019/2020 summer. Australia has warmed 1.4 degrees since 1910, and the United Nations Intergovernmental Panel on Climate Change (IPCC) recent report predicted more frequent bushfires, droughts, floods and rising sea levels.
Now you must be asking, I don’t think my home is in danger so how does this affect me personally?
The answer is that your home insurance premiums could rise due to being part of a ‘high risk’ area. Also if you lose your property the debt remains.
Will potentially bad weather impact my home insurance?
It is easy to forget that when it comes to getting a home loan and buying a home, there are extra expenses that come into play. This includes local council fees, utilities and amenities, and home insurance.
Just like your car insurance goes up after a crash, home insurance is the same. If your property is at a high risk zone, your insurance costs may go up due to the likelihood of potential climate crisis damages.
There is also the fact that if you do lose your property to a natural disaster you’d still be expected to pay your home loan debt even if the house is no more.
“For this reason it is very important that if you have a mortgage you hold insurance to cover at least the amount of the loan, and that any potential insurance events are not excluded by your policy,” said Peter Marshall, Mozo’s banking expert.
For example, if your home insurance covers $400,000 but you have a $450,000 loan, then depending on your policy, you will owe the lender the $50,000 the insurance didn’t cover. If you don’t have insurance, that means you owe the lender the remaining $450,000 because the one who pays the debt is you, not the property.
That means that as a property owner in a high-risk region you should get insurance that covers potential extreme weather damage.
The keyword for the RBA's report is ‘potential.’ It is hard to predict the future, but that’s why it is important to be prepared rather than being caught by surprise. Especially when IPCC has forecast worsening climate disaster as the Earth continues to warm at a rapid rate.
“The considerable uncertainty about the exact magnitude of the impacts from climate change makes it essential that banks further integrate climate risk into their mortgage and business lending processes and report on it to enable external assessment of the risks,” says the RBA.