Climate risk could impact home values. You can be prepared.

Dr. Sarah Kapnick, Sustainability Strategist, Senior Climate Scientist*

Amanda Lott, Executive Director, Head of Wealth Planning Strategy

Joe Seydl, Senior Markets Economist

Dan Alter, Managing Director, Mortgage Solutions, J.P. Morgan Private Bank

The probability is rising that climate change will affect the value of homes across the world—though it hasn’t yet.

Indeed, right now, housing prices are soaring, even in many locations where it seems climate change might damage property or make insurance difficult to obtain.

You may want to use this reprieve to get your house in order—before climate change or the perception of it has a chance to hurt home values in your real estate market.

There’s much you might do to safeguard the houses you own, protect yourself when buying homes and help your family when passing homes to the next generation.

Current market prices generally don’t reflect climate risk

Property values surged in 2021, with 41% of U.S. homes selling above asking, up from a 33% increase in 2020.¹ The price hike occurred even in some places where climate risk is a factor. Indeed, Redfin noted that the 10 hottest neighborhoods in 2021 all had significant climate risk; eight were in Florida.²

One reason for such potential overvaluations is there is no central information database to inform consumers of climate risks in their locations; no equivalent to car buyers’ automobile value estimators.³

But also, real estate has a lot of nonmonetary value. We may know there is a risk of hurricane damage if we buy a home next to the ocean, but may value glorious views, access to beaches and our family memories more than we fear the potential costs of property damage and depreciation.

Indeed, subjective valuations may be the reason that a study found people who plan to live in their houses underestimate climate risk more than those who are merely investing in properties.⁴

Still, home dwellers are increasingly taking climate risk into account when purchasing new residences. And for some homeowners, the new calculus has already become unavoidable.⁵

Insurers seek to protect themselves

Insurers have long used historic losses to structure catastrophe policies. But climate change alters the risk of physical damage, potentially leading to systematic mispricing.

That is one reason why, after years of drought helping to spark record wildfires, insurers are leaving even the high-end California market.⁶ Owners of multimillion-dollar homes have recently been dropped by their insurers and are having trouble finding a company willing to cover their homes.⁷

California’s experience is unlikely to remain unique. In the United States, billion dollar climate change disasters have been occurring more but irregularly since 2000.⁸

Global economic losses from natural catastrophe events in 2020 alone were USD 190 billion, according to Swiss Re Institute, which added that in GDP-normalized terms, losses rose 1.6% between 1970 and 2020 on a 10-year moving average basis. ⁹

Compare the number of U.S. billion-dollar disasters over time*

California is considering proposals for new insurance pricing, some insurers are using AI to model and price future climate risk, and startups are emerging to provide new structures for insurance.¹⁰

Insurers across the world are watching and doing their own calculations.¹¹ Even as they do, there are steps you might take now to protect yourself.

How to build your climate plan

Whether you already own or are looking to buy, it’s simply smart planning to be ready for potentially higher carrying costs (insurance premiums); to expect outlays for regular improvements; and to make realistic assumptions on future appreciation.

More specifically, you can prepare yourself and your family for climate risk to real estate by:

1. Doing a climate risk audit-It takes a little digging but information is available across the world from government sources and insurers. In the United States, for example, see the Federal Emergency Management Agency’s flood maps; and the Climate.gov resiliency toolkit to identify risks by location and hazard. Some insurers are even developing consulting services for climate risk and may provide suggestions about building retrofits for perils like wildfires. ¹²

2. Right-sizing your liquidity-Increase your “liquidity bucket” to make sure you wouldn’t have to disrupt your longer-term investments if a climate event forced you to pay higher carrying costs and outlays. Consider establishing a line of credit so you don’t have to keep a significant amount of cash on the sideline “just in case.”

3. Being an informed investor-If you’re buying real estate for personal enjoyment, treat it as such (you’re buying a beach house because you love the ocean, not because you think this home will appreciate). But if you’re buying real estate as part of your investment portfolio, make sure you, or the fund managers you select, identify potential climate risks to diversify holdings geographically (as you would diversify any investment portfolio to lower risk) or retrofit properties after a climate risk audit.

4. Keeping your houses up to code-Building codes are changing to protect against climate-related and other risks but they apply only to new builds. Check the age and structure of your home, then repair any gaps between our home and the latest codes. Stay up to date on those codes.¹³

5. Factoring climate risk into your estate plan-If you plan on leaving a home to your children, make sure you get on the same page with them early. Passing on real estate can be tricky and it’s further complicated if it may come with rising carrying costs and potential pressure on its value. To avoid future family conflict, find out how your heirs feel about this potential inheritance so you can adapt your estate planning documents accordingly.

Asking for help

Even if you don't think climate change is happening near you this year (or ever), it is a growing factor in the real estate market that could drive behavior and require your awareness.

Your J.P. Morgan team can help you think it all through, and help you price your risk, for your homes and investments.

^*Dr. Sarah Kapnick is a former Managing Director and Senior Climate Scientist and Sustainability Strategist for Asset and Wealth Management (AWM). Following her time at J.P.Morgan, she joined the National Oceanic and Atmospheric Administration (NOAA) as their chief scientist.

^{1 Tim Ellis, “Housing Market Update: 2022 Kicks Off Hotter Than Last Year,” Redfin, Jan. 20, 2021.}

^{2 “Florida Frenzy,” Redfin, Dec. 17, 2021. “Mimi-Dade's sizzling housing market ended 2021 at a record level. What keeps driving this upward trend?”}

^{3 Climate-related information is out there, although most has been developed by the public sector and yet to be translated for the private sector. This is expected to change. Among the car value estimators are those supplied by CARFAX, Edmunds, Kelly Blue Book (KBB),and the National Automobile Dealers Association (NADA).}

^{4 Asaf Bernstein, Matthew T. Gustafso and Ryan Lewis, “Disaster on the horizon: The price effect of sea level rise,” Journal of Financial Economics, Vol. 134, Issue 2, Nov. 2019, pp 253-272.}

^{5 Ibid. Indeed, Redfin’s Housing Market Predictions 2022, Prediction #7 was “Homebuyers will take climate risks seriously.” Keli Maree Borland, “California wildfires do impact home values,” GlobeSt.com, Oct. 7, 2021.}

^{6 https://am.jpmorgan.com/us/en/asset-management/adv/insights/portfolio-insights/sustainable-investing/preparing-for-climate-change-how-drought-will-change-the-us-west/}

^{7 These pullouts follow years of non-renewals by mass-market renewals. Insurance, if the homeowners can find, could cost three to five times more and offer less generous coverage. To the north, the Insurance Bureau of Canada has been warning homeowners they might not be able to buy a new insurance policy if they have suffered a fire. Leslie Scism, “Wildfire Risk in California Drives Insurers to Pull Policies for Pricey Homes,” Wall Street Journal, Jan. 19, 2022.}

^{8 NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2022). https://www.ncdc.noaa.gov/billions/, DOI: 10.25921/stkw-7w73}

^{9 Lucia, Bevere and Andrea Weigel,“Sigma 1/2021-Natural catastrophes in 2020,” Swiss Re Institute, March 20, 2021.}

^{10 Noor Zainab Hussain and Carolyn Cohen, “Risky business: Climate change turns up the heat on insurers, policyholders, Reuters, Nov. 11, 2021. “Protecting communities, preserving nature and building resiliency,” California Department of Insurance, Climate Insurance Working Group, July 22, 2021. The recommendations were released July 22, 2021.} 

^{11  For example, flood insurance is changing in the United Kingdom as more homes are exposed to flood insurance. New startups have developed to deliver parametric insurance with payouts tied to an observation of weather instead of observed damages—simplifying policy structuring. https://news.trust.org/item/20201120164732-wuhf0/}

^12 Ibid.

^{13 In the United States., many codes are local and not federal, with gaps for adopting uniform codes across the country. International codes have also been developed and may be used by insurers in reviewing risk.}