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Climate change is transforming where and how we build

Another year, another ‘once-in-a-century’ natural disaster. Flooding on New South Wales’ mid-north coast has thrust non-insurance against climate change risks into the spotlight after the Insurance Council of Australia (ICA) declared a catastrophe.

The Climate Council has estimated that unless natural disasters are mitigated, home insurance policies could become “effectively unaffordable” for one in 19 Australian homes by 2030. Thousands more will see their insurance premiums double or even triple within decades, the data reveals.

A property is defined as potentially uninsurable when climate risk is so high that annual insurance premium is priced at or above 1 per cent of the cost to replace the property — in effect, becoming so expensive as to be unaffordable and therefore effectively unavailable.

Recent research from USA concluded that mortgages written on homes in exposed locations are being shed by banks and absorbed by government-backed mortgage guarantors. This implies that homeowners and investors have been making location decisions without properly pricing the cost of potential peril, and that the government has been enabling the oversight. Some are even warning that this market failure could lead to a repeat of the 2008 financial crisis, which was also triggered by bad mortgages.

It’s not just homeowners investing recklessly — many businesses have been equally short-sighted in where they place new assets, such as factories, and what to do with existing assets in once-safe areas now threatened by these perils. While laudatory efforts continue to mitigate climate change at the international level, it’s long past time to accept that the climate is already irreversibly changing, and we must adjust our mindset accordingly. We can’t just keep piling sandbags, pumping basements, dousing flames, and expecting government bailouts forever; a methodology is needed for homeowners, businesses, mortgage holders, governments — all of society — to figure out which assets to reinforce and what other courses of action are available.

US research indicates there are five basic choices for a decision-support tool to achieve resilience for assets exposed to climate risk: reinforce, rebuild, rebound, restrict, and retreat.

Growth pressures in Australia are increasing in many locations, including coastal cities. If a severe price correction (and subsequent economic shock) is to be avoided, all asset owners in potentially exposed locations will need to pick one of five paths outlined above. The right choice in each situation depends on circumstances, the level of exposure, the cost of potential damages, the cost to reinforce and resources available.

Prediction from Everlution Newsletter:

Banks will start to screen mortgages in the near future from a climate risk perspective in high risk areas, leading to a significant change in property values.

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