As a lot of capital is raised through the country’s banks, climate change it is probably the biggest risk because about 80% of wealth is tied to people’s homes.
Most Kiwis live close to the coast and 60% of bank assets are in domestic real estate.
Taking a materiality perspective it seems to be the biggest risk the country faces and while New Zealand does not have uninsurable pockets of property near coastal areas, it is not far away.
The risk of flooding has long been a fact of life in many coastal communities, but increasingly volatile conditions due to the changing climate may mean more serious, and more frequent, floods.
Preparation for this is underway through the Government’s draft National Adaptation Plan, which is open for consultation.
It is designed to help communities across the country adapt to the unavoidable impacts of climate change and includes discussion of managed retreat, or moving people, property and infrastructure away from areas at high risk.
Insurance company Tower’s chief executive Blair Turnbull says in a recent podcast on interest.co.nz the National Adaptation Plan and the Natural Hazards Bill that is going through parliament are “really, really important to now start informing ourselves and responding. The key thing about the national adaptation plan is we're round the table talking about it.”
Belinda Storey who has done extensive work on property and climate change agrees with Turnbull.
At a recent CoreLogic event on climate change, financial stability and property, Storey, managing director of Climate Sigma, says while climate change isn’t having much of an impact yet, it absolutely will.
“The insurance market isn’t yet incorporating climate risk or if it is it is incorporating such a small proportion of it. It is overwhelmed by general increases.”
Westpac senior manager, sustainability Olaf Adam says the reason banks and insurance companies have not put retreat risks into their models is because of the high degree of uncertainty. “It is not something one institution or player should be doing off the hip based on what is administratively convenient.”
Adam says there is a lot more knowledge that needs to be acquired. “When we are asked to make impactful decisions that affect people’s lives it needs to be right, but not just that, we need to ensure information is widely available to people who make the decisions in the first place.
“We want to be in a position where customers make the decisions for themselves and we can support them and not be in a position where we force somebody’s hand.”
The work Storey does demonstrates how much property is overvalued relative to its climate risk.
She says the key thing is properties that are exposed to extreme weather events and damage have a time limit on them.
“There is going to be limit to how long they are going to be safe and economic to remain in areas subjected to extreme weather events. It’s a difficult message to deliver.”
Storey says while councils and homeowners are concerned there is a strong preference to ignore it or push it out into the future. “There is a desire to build defenses or bring in a public subsidy on insurance, for example, giving the impression the problem can be fixed. It won’t be fixed. All that is doing is buying a bit of time and probably at the same time make the problem worse.”
University of Otago associate professor Ivan Diaz-Rainey and his team are looking for answers into the link between house prices and climate risk.
As a finance educator, he dwells on the borders between money matters and green solutions - a space he calls "climate finance".
Now, along with a team from a broad range of disciplines such as real estate, finance, climatology and hydrogeology, the Strand Marsden Fund Project will run for the next three years, and involves academics examining housing data to see whether failing to account for future risks has the potential to destabilise New Zealand’s banking and finance industry.
They began with a pilot study in South Dunedin, and what the project found was straight after the 2015 flood, where water levels threatened 1,000 homes and businesses, residential property prices slumped by 50%, but once people started realising it wasn’t about climate change but maintenance of infrastructure and it receded in their minds, prices recovered.
However, it was hugely disruptive. About 60% of the properties on the flat in South Dunedin were owned by investors and rented out. Many people were uninsured and some landlords were reluctant to get their houses back into livable shape disputing many lives
Diaz-Rainey says while climate change may be priced into South Dunedin property prices to some degree, it is not to a big extent. “There could be a 3-5% discount on properties in this area, so probably not reflecting the long-term climate risks.”
He says nobody knows whether the world will be living in a climate two to three degrees hotter in the future.
Banks, insurers and regulators know what property values are now and want to know what they will be in future, says Diaz-Rainey. “Nobody has a crystal ball.
“We use scenarios, but there are huge amounts of data uncertainty. Everybody wants the answer as to when climate change becomes a binding problem for a particular area, but there is still a lot of data uncertainty to be able to price it at an asset level.”
Tower’s Turnbull says much of the risk can be avoided if councils across the country stop issuing consents that enable building in flood prone areas, on top of "a lot of newer subdivisions that are already in areas prone to flooding and that is causing problems."
Tower has already built up extensive data about the frequency and severity of weather events, Westport and Buller’s efforts to improve flood resilience and, the recent floods in Canterbury and Kumeu.
“We want to make sure we don't have uninsurable areas in the future and that's the reason we must take action," says Turnbull.
Diaz-Rainey says the climate scientists and others can say a certain area is vulnerable and x percentage of properties or values are exposed, but if a bank, insurer and homeowner want to price an individual asset it becomes a lot harder.
“It is the end of the beginning. We now know what we need to know to figure out how to get the answers. We are seeing the birth of a new field that is interdisciplinary and complex and central banks are beginning to take notice.
Diaz-Rainey says while banks, insurers and academics are getting closer to having a macro sense of how big the climate change problem is, people seeking a specific answer to the durability of their home from climate risks will not get the answer any time soon. “They will need to be patient.”