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Homeowners face a $25trn bill from climate change - The Economist -11.04.24

Property, the world’s biggest asset class, is also its most vulnerable.

THE residents of northern Italy had never seen anything like the thunderstorm that mauled their region last summer. Hailstones as big as 19cm across pummelled Milan, Parma, Turin and Venice. Windows were broken, solar panels smashed, tiles cracked and cars dented. The episode cost the insurance industry $4.8bn, making it the most expensive natural disaster in the world from July to September (the figures exclude America, which collates such data separately).

Yet insurance executives, although smarting, were not surprised. Climate change is making such incidents much more common. In the decade from 2000 to 2009 only three thunderstorms cost the industry more than $1bn at current prices. From 2010 to 2019 there were ten. Since 2020 there have already been six. Such storms now account for more than a quarter of the costs to the insurance industry from natural disasters, according to Swiss Re, a reinsurance firm. In Europe, not known for extreme weather, losses have topped $5bn a year for the past three years.

Climate change is doing vast damage to property all around the world, and not always in the places or the ways that people imagine. Hurricanes, wildfires and floods are becoming more common and more severe—but so are more mundane banes. In London, for instance, the drying of the clay on which most of the city stands during summer heatwaves is causing unexpected subsidence, landing homeowners with big bills.

A similar problem afflicts Amsterdam, where many older buildings are built on wooden piles inserted into the boggy soil in lieu of conventional foundations. Extended dry spells in summer are lowering the water table, drying out the piles and exposing them to the air. This allows the piles to rot, prompting the buildings above to sag.

Unlucky homeowners can be saddled with bills of €100,000 ($108,000) or more for remedial work. And on top of the expensive repairs climate change is foisting on homeowners comes the likelihood that governments will oblige them to install low-carbon heating and cooling, or improve their homes’ energy efficiency, adding yet more to their costs.

Money pit

The upshot is an enormous bill for property-owners. Estimates are necessarily vague, given the uncertainties not just of the climate but also of government policy. But MSCI, which compiles financial indices, thinks that over the next 25 years the costs of climate change, in terms both of damage to property and of investments to reduce emissions, may amount to almost a tenth of the value of the housing in institutional investors’ portfolios. If the same holds true of housing in general, the world is facing roughly a $25trn hit.

The impending bill is so huge, in fact, that it will have grim implications not just for personal prosperity, but also for the financial system. Property is the world’s most important asset class, accounting for an estimated two-thirds of global wealth. Homes are at the heart of many of the world’s most important financial markets, with mortgages serving as collateral in money markets and shoring up the balance-sheets of banks.

If the size of the risk suddenly sinks in, and borrowers and lenders alike realise the collateral underpinning so many transactions is not worth as much as they thought, a wave of re-pricing will reverberate through financial markets. Government finances, too, will be affected, as homeowners clamour for expensive bail-outs. Climate change, in short, could prompt the next global property crash.

At present the risks of climate change are not properly reflected in house prices. A study in Nature, a journal, finds that if the expected losses from increased flooding alone were taken into account, the value of American homes would fall by $121bn-237bn. Many buyers and sellers are simply unaware of the risks. When these are brought home, prices change. A study published in 2018 in the Journal of Urban Economics found a persistent 8% drop in the price of homes built on flood plains in New York following Hurricane Sandy, which caused widespread flooding in 2012.

Properties just inside zones in California where sellers are required to disclose the risk of wildfires cost about 4% less than houses just outside such zones.

In many cases, the risks climate change poses to property are only slowly becoming apparent—as with London’s geology. The distinctive yellowish bricks with which many houses in the city are built are made from the clay on which the houses stand. It is good to build with, but recently has proved not so good to build on. During the now-milder winters, there is higher rainfall, since warmer air can hold more moisture.

As the clay absorbs the rain, it expands. Warmer summers then dry it out again, causing the ground to contract. That would not be a problem if the expansion and contraction were uniform, says Owen Brooker, a structural engineer. But they are not, owing to trees, which suck up moisture in their vicinity. The resulting variation in the accordion effect causes the ground to buckle and twist in places, and the houses above to list and crack.

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Homeowners face a $25trn bill from climate change - The Economist - 11.04.24
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This article appeared in the Briefing section of the print edition under the headline "Risk of subsidence".

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