The value of global real estate is enormous, topping $217 trillion–of which 75% is residential homes and property. Given this scale, it is hard to overstate the importance of real estate to people’s personal fortunes. For many, it is their largest single investment.
Climate change is increasingly having an impact on residential homes in vulnerable areas where people like to live: along seacoasts, next to ski slopes or in the arid foothills of mountain ranges. Homebuyers are beginning to recognize this new climate change reality – and real estate markets are starting to reflect these shifts.
Among homeowners, there is a growing awareness of the true impact that climate change is having – or will have – on their property. Some are already taking action – or are being forced to act. Others are staying put, hoping for the best or simply ignoring the risk. Unfortunately, many of these owners are unwittingly playing a prolonged game of hot potato, which may leave some with diminished value when markets bake in the costs.
Understanding how climate change is transforming home buying behavior and preferences will help people make more informed investment decisions. Here are five ways how:
- Climate shocks transform buyer preferences overnight
Climate shocks – sudden, extreme events like hurricanes Katrina and Harvey – can rapidly upend local real estate markets. Sadly, New Orleans provides a case study as to how this can happen: In the aftermath of Katrina, real estate prices shot up almost overnight in higher and drier areas of the city as thousands of people scrambled to find new places to live – and outsiders poured in to rebuild the city. Demand for these more protected properties remains high, with prices now nearly 50% over what they were before Katrina.
Meanwhile, people in flooded areas were left with homes that dropped in value. Compounding this problem, many homeowners did not have flood insurance, leading many to default on mortgages or even go into bankruptcy.
- Threat of personal harm overrides other buying considerations
Climate change does not just threaten to damage property, but cause personal harm too. Many people who live by the sea, for example, view this threat as manageable because there is typically ample time to evacuate before a hurricane hits.
But, climate change also threatens personal harm in more immediate and less controllable ways. People are responding to these risks by shifting their home buying preferences. Take Lyme disease as an example. In recent years, Lyme disease has spread widely across the Northeast and Midwest, greatly increasing the number of people afflicted. This spread has been fueled, in large part, by warmer winters that have allowed the ticks that carry the disease to flourish.
Evidence suggests that people are reconsidering whether to live in rural areas in response to the growing prevalence of the disease. In fact, a recent study measured that for every 10% increase in Lyme disease incident rate, there is a slight, but significant, decline (0.1%) in the local population. Greater health threats are apparently giving prospective homeowners pause – or motivating existing residents to leave – overriding other considerations when making home buying decisions.
Another example is wildfires in California this year that were likely fueled by climate change. A study of the aftermath of a similar fire in Southern California suggests that wildfires precipitate price declines for surviving homes within the vicinity of the fires as people feel less safe living there. After the first fire, prices of surviving homes dropped an average of 10%; after a second fire, home prices dropped 23%.
Prices can recover if risks are mitigated. Learnings from another devastating fire in the hills above Oakland, CA, suggest property values recovered years later, as the neighborhood was rebuilt with more safety in mind: homes rebuilt using fire retardant designs, materials and landscaping, streets widened to prevent fires from spreading and facilitate egress during emergencies, and a fire station was built nearby.
- Buying decisions are still made based on recent experience
People love to live near mountains or in proximity to a ski slope. Decisions to buy in these areas are most often based on our own personal experiences, rather than empirical evidence of what might happen to these areas in the future. As a new normal with climate change becomes apparent, being behaviors are likely to change.
Buying property near a ski resort is a great example. Changing weather patterns in winters are reducing ‘ski reliability’, especially at resorts located at lower elevations. A study of Western ski resorts concludes that potential homebuyers make their decisions by looking backward at snow conditions over the medium term (3-10 years) rather than by looking at future predictions. This suggests that people will be more apt to buy homes if they had a positive experience skiing in the recent past or if previous years’ conditions were good, even if long-term ski conditions are predicted to deteriorate. This also means that buyer enthusiasm for ski properties may wane as conditions deteriorate.
Today, Zillow estimates that 1.9 million homes are in coastal areas vulnerable to rising seas. These properties are concentrated in states such as Florida (934,000 homes), New Jersey (190,000) and New York (96,000), and in cities such as Boston (17 percent of homes), Honolulu (24 percent) and Miami (30 percent). Most of these buyers likely purchased these properties based on how conditions are today – rather than how they will be in the future. Unfortunately, such properties will be increasingly vulnerable to rising seas without massive infrastructure investments to protect them.
- Home values are eroding
Historically, people have bought real estate because of the location or view. What buyers value in a home is starting to shift, however, as climate change impact becomes more real. Today, some homebuyers are losing their enthusiasm for coastal properties. According to Attom Data Solutions, the parent company of RealtyTrac, “over the past five years, home sales in flood-prone coastal areas grew about 25 percent less quickly than counties that do not typically flood”. Another study found that “homes exposed to sea-level rise sell at a 7 percent discount compared with equivalent but unexposed properties”.
Rising costs may be driving this shift. Flood insurance premiums are increasing to reflect actual risk, depressing home values. As Waye Pathman, Chairman of Miami’s Sea Level Rise Committee, noted, “For every $500 worth of increase in flood insurance, you lose $10,000 of property value.” Moreover, property taxes are increasing as communities spend tax dollars to raise roads and enhance drainage to stave off rising seas.
Another reason is that residents are simply growing tired of the daily inconveniences caused by king tides that leave flooded streets on clear days and make car insurance more expensive and harder to obtain. Others are weary of dealing with construction crews on or near their properties that are reinforcing shorelines against rising seas.
Jesse Keenan, a lecturer of climate change adaptation at Harvard University’s Graduate School of Design, suggests that coastal residents are starting to trade homes in low-lying areas for ones on higher ground. Some even speculate that less affluent Miami neighborhoods that are located on a coastal ridge (15 feet above sea level) are gentrifying because of this migration.
Miami isn’t the only city where people are moving to higher ground. Hollywood celebrities on the West Coast are moving to the hills above Malibu Beach. In the process, they are upending a longstanding notion of what makes a desirable place to live: “The whole ‘being on the beach’ thing has started to fade away,” Anthony Paradise, a real estate agent at Sotheby’s, told the Hollywood Reporter.
- Sometimes, the only thing left to do is to walk away
In some places, future prospects are so bleak that the only thing left for homeowners to do is walk away. Louisiana, for example, is preparing a plan to relocate thousands of people living in low-lying coastal areas, “effectively declaring uninhabitable a coastal area larger than Delaware”. In Alaska the story is similar: villages seek to relocate because the permafrost beneath them is melting, accelerating erosion and exposure to the sea.