In the run up to the 2008 financial crisis, a few savvy sceptics
understood what would later become obvious - the mortgage market was
teetering on the brink of collapse. One of the investors who saw it
coming now believes financial disaster could be brewing in the
housing market yet again. But this time the threat is from flooding.
This one is better?
Dave Burt who was profiled in Michael Lewis's bestselling book,
The Big Short, and saw one of his colleagues played by Brad Pitt in
the movie adaptation, says the fallout from flood risk could
resemble the extraordinary correction seen 15 years ago.
And then that happens.
What is that?
That's America's housing market.
Did you feel that perhaps Brad Pitt maybe was more better suited to
playing you?
I don't know, I think he did a great job. It was a really
entertaining movie, even though they might not have gotten every
technical point exactly right. I thought it was a good explainer,
a good explainer movie for that whole saga.
This time, Burt says that flooding is easily among the most mispriced
climate hazards in the U.S. real estate market, especially for
single-family properties.
Our base case correction scenario leads to home value losses of about
$800 billion in aggregate terms. So a pretty meaningful hit, even to a
$40 trillion market.
Flooding is recognised as the most common natural disaster in the U.S.
And yet despite that, the risk of flooding to housing markets is
feared to be far greater than current government estimates.
Millions of households in the U.S. and worldwide are thought to be
exposed to this hidden time bomb - an issue that's predicted to worsen
as the climate emergency deepens. Several cities across the country,
stretching from Los Angeles on the Pacific seaboard, New York on the
East Coast, and Cape Coral in Florida, are known to have a number
of properties heavily exposed to flood risk. Researchers say the
cost of unrealized flood risk in the U.S. is a growing threat to the
economic stability of households, as well as the broader mortgage market.
I think that the real problem is that a lot of the biggest risks are
actually in developing nations. So it's not about the value of homes
causing mortgage defaults. It's more that an acute event occurs,
and actually the governments are unable to handle the losses that
come with that event. And then you end up with this being more of a
humanitarian crisis, which obviously affects everyone to the
extent that we're all linked in this global economy.
Extreme weather events brought on by the climate crisis are already
evident. So too are the risks to people's homes. 2022 saw
apocalyptic floods in Pakistan following a record-breaking monsoon
rainfall. The disaster submerged one third of the South Asian
country and damaged more than 2.2 million houses. In the same year.
Nigeria faced its worst flooding in a decade. The destruction impacted
nearly 3 million people across the country, killing hundreds as water
submerged farmland and infrastructure. Cities like the
Indonesian capital of Jakarta and Ho Chi Minh City in Vietnam are
sinking too - in part due to excessive groundwater extraction
for drinking and everyday use by residents - making homes in these
low-lying areas even more vulnerable to flooding. Meanwhile,
Hurricane Ian, which devastated the Americas was found to be by far the
costliest natural disaster of 2022, racking up roughly $100 billion in
losses and exacerbating an already urgent housing crisis in Florida.
In the U.K., at least one in six people in England are recognised as
being at risk from flooding from both rivers and the sea. Densely
populated cities such as London, Cardiff and Edinburgh could see
damage increase by more than 25%, even under a scenario where global
heating is limited to 1.8 degrees Celsius above pre-industrial
levels. Here in England's southwest city of Bristol, local policymakers
have described the risk from flooding and rising sea levels as a
"humongous threat". And that warning comes as thousands of new
homes are already being planned in parts of the city identified as
acutely vulnerable to flooding. I sat down with Paul Bates, a U.K.
flooding expert and professor at the University of Bristol to find out more.
Most people – when they think about flooding and the climate crisis – think that things
will get an awful lot worse into the future. But it overlooks the fact
that flooding is not well managed now.
We've got a lot of buildings in the U.K. that are in flood zones — like where we're sitting —
and that doesn't really change and the better we manage emissions,
the greater the percentage of risk that's with us now. So if the
increase stays below 10%, then that means obviously that 90% of the
risk we'll face in the future is already with us.
In the U.K., expected damages from flooding are estimated to be around
$870 million per year. This is not only seen as a significant drain on
the economy, but also a considerable sum of misery for
those affected. Not everyone is as concerned about the potential
impact of flooding, however. Many investors remain sceptical about
the impact of climate risks on their portfolios, while almost two
thirds of U.K. households don't see flood risk as a problem that
they'll need to worry about. A key point that is not well understood
is that most of the U.K.'s future flood risk is already here.
Oliver Wing, chief research officer at flood modelling firm Fathom,
explains how these risks are likely to evolve under different global
heating scenarios.
As a national overview, you generally aren't seeing a huge
amount of change if warming is limited to 1.8 degrees by the end
of the century. But that national picture really masks regional
differences. There's winners and losers when it comes to flooding in
the U.K. under climate change. A 3.3 degree world would be a
disaster for so many reasons. But when we look at the available
information to us, you can see this map suddenly lighting up, right,
that places that might have seen quite a modest change nationwide
are actually seeing huge increases in this warming world. We often
hear a lot, right, about what the cost of climate action might be,
how expensive an energy transition might be. Well, here's the
alternative, right? This is the cost of doing nothing and it's massive.
For those sounding the alarm, the crux of the problem is that until
homebuyers and owners have sufficient information about what
climate-related costs could look like new problems are being created
every day. A 2023 study looking at the U.S. housing market warned the
increasing likelihood and cost of flooding had fueled concerns that
the mortgage market is mispricing these risks. And as a result, it's
creating a $200 billion real estate bubble. Should this bubble burst,
researchers say households could end up losing a significant portion
of their property value overnight. It's currently estimated that more
than 14.6 million homes in the U.S., or 10% of all properties,
face a 1% annual likelihood of flooding. An expected increase in
the frequency and severity of flooding could expose another 1.6
million homes by 2050, while annual damages are forecast to jump 26%
over the same period. Besides coastal housing markets,
researchers have warned that low-income households and
communities are also particularly vulnerable to home devaluation. For
Burt, the recovery in Florida from Hurricane Ian is one he'll be
continuing to keep a close eye on especially because the storm surge
exposed a flood insurance nightmare for homeowners
The south coast of Florida - I mean, one area we're watching very,
very closely is Lee County, which unfortunately sustained a
devastating hit from Hurricane Ian in 2022. We had in 2021, we'd
actually placed Lee County at the very top of our list for counties
or metropolitan areas within the U.S. that had the highest mispriced
flood risk. So we're watching that area very closely to see how
markets are able to come back from that event.
It's not just Florida that's wading through an insurance crisis. Many
households and businesses in Australia have seen insurance
premiums skyrocket after a near-endless series of
climate-related disasters. It's a problem that's particularly bad in
flood-hit areas of the country. Meanwhile, in Germany, which
incurred excessive flooding in 2021, insurers have warned that
insurance premiums may get out of hand unless the government stops
building new homes in flood prone areas. Sarah Smith, the head of
home underwriting at LV= General Insurance, feels the flood risk to
households demands more of an integrated approach.
We fundamentally believe that there has to be a more holistic approach
to planning and housing reforms around where we build homes in the
future The immediate flood risk might be known, but what isn't
often known and taken into consideration is that of the future
flood risks and we would like to see more done in that space.
So what is it exactly that people can do to mitigate the risk of
flooding? Consumer groups and government agencies typically
advise using online resources to identify the flood-risk in your
area, and to purchase affordable home insurance to cover you in the
event of flooding. Resistance measures to stop flood water
getting into your property, and reduce the damage, if it does, are
also recommended. These steps can include flood barriers, installing
non-return valves into drainage pipes, water-resilient paints, and
raised electrical sockets.
Ultimately, the problem is that doing nothing makes the problem
worse every day. So it's really, it just needs to be an elevated
awareness. People shouldn't feel complacent, just because their
insurance prices haven't gone up a ton yet and they have to realize
that even if you're in a safe place that doesn't have this exposure
directly, all of these systems are tied together.