Climate change has quickly become a hot topic in both the U.S. and around the globe. Every day we see news stories reporting unprecedented flooding, wildfires, and hurricanes. The U.S. suffered 11 major natural disaster events in 2018 causing more than $11 billion in residential and commercial real estate losses. The floods in the Midwest in March 2019 alone caused more than $1.5 billion in estimated losses and damages to more than 2,000 homes in just one week.
For real estate investors, the risks of climate change are very real with natural disasters risking not only damage to property but total destruction. It is not just individual assets at risk but also entire metropolitan areas and their economies.
According to NASA, 18 of the 19 hottest years of our planet’s recorded history have all occurred since 2001. The five hottest years on Earth were the last 5 years – 2018, 2017, 2016, 2015 and 2014. Last year was the hottest year on record in 29 countries and Antarctica. The topic of climate change, once reserved for hard-core environmentalists, is now gaining traction with 73% of registered voters in the U.S. believing climate change is a real problem, an 11% jump since 2013.
Environmental Factors
It is not just natural disasters affecting the real estate market, though, with an increasing number of environmental factors coming into play. These environmental issues can have a substantial impact on real estate affecting everything from its value to its livability. The American Lung Association estimates that almost 40% of Americans are at risk of developing some sort of fatal disease because of breathing polluted air. Air pollution does not only affect an individual’s housing but has wider implications of affecting the housing market in entire regions, and the risk of losing its appeal to investors and citizens alike.
Reliable data on air pollution has not historically been accessible to those in the real estate market but with increasing awareness, companies are emerging set on tackling this problem. Data and information is becoming increasingly available on air quality to enable real estate agents and investors to make informed decisions. The data aims to help people decide where to live based on where they are less exposed to the effects of atmospheric pollution, as well as, reducing the risk of loss of investment due to environmental factors.
Water pollution also poses a risk when investing in real estate, even when the property does not come into direct contact with water. Air pollution can end up as water pollution when rains absorb pollutants from the air and bring it down to the ground. Sometimes referred to as acid rain, this rain can potentially mix with local bodies of water, directly affecting the land it comes into contact with. The pollution can have a long term effect on the groundwater below the surface of the land spreading the pollution to other areas.
For properties with direct frontage to water, water pollution can carry further risks when the contaminated water comes into contact with the land. The soils and sands on the property absorb the water and any pollutants present in the water. The toxicity from the pollution can build up causing harm to residents who rely on the water for irrigation or for household use. Water pollution can potentially affect all living things, though, not just humans but also crops and animals. For those in the real estate market, the costs of obtaining clean water to properties can be high for those in water polluted areas. Damage to properties caused by water pollution can also carry hefty costs.
Lowering Carbon Emissions Is a Team Effort
It is not just homeowners and real estate investors who are being encouraged to take action, but there is an increase in City Councils, companies, and organizations putting in place plans to tackle pollution on a wider scale, adopting new ‘green’ building practices, utilizing new technologies to better understand climate change. New legislation is also being put in place to reduce fossil fuel emissions and improve energy efficiency in buildings.
In New York City, there are over 1 million buildings, and these skyscrapers account for roughly 75% of all citywide greenhouse gas emissions. New legislation coming into place will mean that buildings exceeding 25,000 gross square feet must reduce their greenhouse gas footprint starting in 2022 and each year thereafter they will have to meet a sliding scale of emission limits. By 2050, citywide emissions are expected to be 80% lower than they were in 2005.
Financial Institutions and Climate Change
It is not just individuals and companies needing to take climate change into account when it comes to the real estate market, but also financial institutions. In December 2018, the Bank of England announced that they were considering adding climate change risks to their bank stress tests starting in 2019. These tests evaluate whether financial institutions have enough capital to survive extreme economic shocks without needing a government bailout. Climate change has not previously been part of the equation for bank stress tests.
A 2018 survey conducted by the Bank of England concluded that only 10% of banks were adequately factoring in climate-related risks, like extreme flooding, and moving away from fossil fuel investment and transitioning to a low-carbon economy. The Bank of England became the first regulator to publish guidelines for banks and insurance companies to develop best practices to manage the financial risks posed by climate change.
The U.S. central bank and its regional branches are also working to determine how to quantify and incorporate climate-change risks into short-term and long-term economic evaluations and recognizing the need to do so will play a major part in future investments, particularly in the real estate market.
Related: 4 Important Factors Affecting the Real Estate Market
Conclusion
Climate change is beginning to be factored in when it comes to the real estate market, with more data and information being made available to enable real estate agents and investors to make more informed decisions when it comes to purchasing property. Financial institutions are putting in place guidelines on climate change risks and this is expected to filter through to the real estate market.
Environmental factors are playing an important role in the real estate market, from whether to invest in a certain area to the potential health risks of living in a polluted area. There is a greater drive from City Councils and other organizations to reduce carbon emissions as well as exploring greener, more sustainable approaches in housing and cities.
The next few years are going to be significant in terms of putting in place solutions to tackle climate change, making way for healthier, more sustainable homes and living.
This article has been contributed by Eoin Connolly.