Surface water and river flooding big risk for property prices

Property owners may see a fall in values in flood zones as risk understanding improves and is priced into the housing market.

The report findings have been pre-released from the RBNZ’s Financial Stability Report, which will be released tomorrow.

In the RBNZ’s exercise, it asked the big five banks to measure their exposure to river and floodwater risk in the Auckland region, although data and capability for assessing that at the national level is not as advanced as that for coastal flooding.

The banks used data from the Auckland Council mapping a 1-in-100 year flood zone aligned with a scenario where existing climate policies remain unchanged to 2050.

Although there was some variability in banks’ approaches, most results include a conservative assumption that a property is at risk if any part of the land area touches the flood zone.

The RBNZ found more than a quarter of the banks’ mortgage lending was in the flood zone. This is equivalent to about 12% of their total mortgage lending at a national level, under a severe climate change outcome.

“This exercise has shown that river and surface water flooding looks to be a greater climate-related hazard for residential mortgages than coastal flooding, in terms of total lending.

“Climate change-induced increases in flooding risk, and related potential changes in insurance behaviour are unlikely to be fully captured in existing house prices. Therefore owners may see a fall in property values in flood zones as we gain an improved understanding of the risks and this is priced into the housing market,” says the RBNZ.

The RBNZ’s risk assessment looked into how banks’ mortgage portfolios would be affected by flooding risks out to 2100 — assuming no change in the types of properties banks will lend against compared to their existing practices.

New mortgages typically have a maximum 30-year term, and on average a mortgage’s principal will be paid down over a shorter time horizon. This means that, through gaining a deeper understanding of the likelihood and extent of future flooding risks, banks can position themselves to avoid being exposed to these risks over time — for example by tightening lending requirements in high-risk flood zones. It also gives banks an opportunity to work with existing customers to manage and mitigate risk, says the report.

“Importantly for banks, 80% of existing mortgages in the identified flood zones have LVRs below 60%. A low LVR means the mortgage borrower has a significant amount of equity to absorb a decline in property value, if this were to occur faster than the remaining term of the loan.

“Falls in the value of properties securing mortgages do not on their own lead to losses for banks. However, with less security supporting a loan, a bank would be more exposed to loss in the event a borrower defaults.

RBNZ deputy governor Christian Hawkesby says the RBNZ’s long-term aim is to support banks to build their capability to identify climate risks and find solutions to the significant data and modelling challenges involved. In turn, this will lead to more proactive management of climate risk, he says. 

“Although the exercise was far from exhaustive, it provided helpful estimates of exposures to selected climate hazards. We will use these findings to help build a picture of system-wide risk and to design further climate-related stress testing activities.

“Although the exercise was limited to flooding risk for residential mortgages, it will help us explore financial system risks from climate change as we build and design further climate-related stress testing activities,” says Hawkesby.