May 30, 2016 - 6:00am
Significant and increasing financial losses will continue to be incurred by owners and buyers of properties built in areas that are vulnerable to climate change unless the governments, regulators, insurers and, especially, the banks take greater responsibility, finds the Climate Institute’s There goes the neighbourhood: Climate change, Australian housing and the financial sector report, released today.
“In terms of climate risk, our analysis shows that, for 2015, a conservative estimate of the amount of housing stock exposed to the effects of coastal erosion alone totaled at least $88 billion, excluding the value of the land itself, while more than 2 per cent of all houses are already exposed to moderate to extreme risks of flooding,” said CEO of The Climate Institute, John Connor. “Growing climate impacts mean the costs of these and other hazards that are exacerbated by climate change, such as bushfire and cyclones, will have worsening repercussions for households, the financial sector and ultimately the economy itself.
“Numerous reviews from the Productivity Commission and others have highlighted these risks but our research finds that, with a few exceptions, there has been insufficient action from governments, insurers and most notably the banks - perhaps surprisingly as they are the mortgage lenders.”
There goes the neighbourhood points out that the housing sector directly or indirectly drives nearly a third of the economy, and mortgages account for about 60 per cent of the big four banks’ assets.
“People continue to buy homes that continue to be built and sold in areas that may be at more risk than they realise,” he said. “Limited sharing of information possessed by public authorities, financial institutions and other stakeholders means buyers aren’t always adequately informed, nor is relevant policy and decision-making.”
He said a messy interplay of local, state and federal government policies continues to enable construction and sale of vulnerable housing which could result in high insurance premiums, and lower market valuations, eventually leading to financial hardship and even mortgage default – risks not fully appreciated at point of sale.
In what is Australia’s largest review of the financial implications of climate risk to housing, There goes the neighbourhood finds that, though regulators, governments and insurers have taken some steps to incorporate climate and climate change risk into their assessment processes, most banks have so far done relatively little to try and address this complex problem.
While Australian banks require proof of insurance before approving a mortgage, they don’t usually check the renewal or scope of insurance in subsequent years. It is also estimated that more than half of households are ‘under-insured’. So, inadequately insured owners risk significant financial hardship if climate damage occurs.
“From a financial system perspective, insurers are more likely to be able to manage their climate housing impact risk as their exposure extends in 12 month premium periods, whereas bank mortgages cover 25 years.” Connor said. “This is a lot of available time for informing owners of changing risk and a lot of time for banks to accrue exposure to extreme weather risk– which some have begun to acknowledge in climate disclosure statements.”
Connor said banks, together with insurers and other stakeholders, must recognize they have a responsibility to begin integrating climate-related risk into their assessment processes in order to make good, responsible decisions when granting mortgages and especially when financing property developments.
There goes the neighbourhood can be downloaded here.
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Brinsley Marlay ● Media Manager ● 0422 140 555