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.
