A number of regions could see a material decline in housing prices due to physical risk from climate change, according to the Reserve Bank.
An analysis from the Reserve Bank of Australia (RBA) has reflected on the risks of climate change to property values and to Australian banks.
The Reserve Bank has calculated that around 3.5 per cent of dwellings in Australia have a value at risk (VaR) rating that exceeds 1 per cent, classifying them as a “high risk” property, in terms of the annual expected costs of climate-related damage such as insurance, repairs and maintenance.
The proportion of high-risk properties is expected to increase to 8 per cent over the next 80 years.
The modelling has also projected that a VaR change of 0.4 percentage points is equivalent to a roughly 10 per cent decline in housing prices, due to climate risk.
By 2050, around 1.5 per cent of properties are projected to experience a rise in annual insurance premiums that could reduce housing values by 10 per cent or more.
However, this moves to 9 per cent of properties by 2100, of which 3 per cent are expected to experience a house price fall of 20 per cent or more.
“These risks could emerge rapidly if buyers start to recognise the increasing risk of climate change and factor this is to current property prices (by discounting prices more heavily than the actuarial fair amount) ahead of climate change impacts being fully realised,” the RBA analysis warned.
The modelling has suggested there will be 254 climate-sensitive suburbs in 2050, with a VaR increase greater than 0.4 percentage points, and in 2100, there will be 1,438 exposed suburbs.
The risks are expected to be concentrated in small geographical areas, mostly in agricultural or coastal regions.
Within the major cities, the highest risk regions are mostly located on the coastline, particularly in Brisbane.
South-Eastern Queensland and northern NSW, which have a large number of houses at risk of coastal inundation, could see the largest rise in high-risk properties, the RBA said.
The analysis also noted banks’ exposure to climate-related risks, stating mortgages account for around two-thirds of the big four’s portfolios and they could stand to see significant credit losses.
“Banks lend using the current value of housing as collateral. If current values do not fully reflect the longer-term risks of climate change, housing prices could decline, leaving banks with less protection than expected against borrower default,” the RBA said.
“A number of international studies have indicated that there is little evidence of climate change being fully priced into ‘at risk’ properties, even in highly vulnerable areas like the US state of Florida. As a result, 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.”
Banks could also see larger risks if climate change causes incomes or certain sectors to decline, the analysis said.
Further, the RBA’s results suggested that climate change could result in banks having 2.5 per cent more mortgages (400,000 loans) with a loan-to-value ratio (LVR) greater than 80 per cent.
Around half of the captured loans are calculated as having an LVR higher than 90 per cent.
Pointing again to certain regions, the RBA noted the risks appear to be concentrated in banks with greater exposure to certain NSW and Queensland regions, rather than the major banks.
But the risks to banks’ portfolios may be overestimated, the RBA noted, as they are expected to increasingly embed climate risks into their lending decisions.
Speaking at an environmental, social and governance (ESG) briefing on Tuesday, Westpac chief executive Peter King commented the bank has estimated around 2 per cent of its mortgages book could be impacted by climate change.
Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.
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