Economy

How climate change is affecting the real estate market

Floods in Germany repeatedly cause great damage, as here in Fischbeck in Lower Saxony during the 2013 flood.

Sean Gallup / Getty Images

Climate change increases the likelihood of natural disasters in Germany and around the world. Between 1980 and 2019 alone, the number of globally registered weather disasters more than tripled

For example, the world’s largest reinsurer, Munich Re, recorded a record hurricane season in the past year alone, which brought more storms in the North Atlantic than ever before. There were also historic forest fires in California and Colorado. According to Munich Re, natural disasters caused damage totaling 210 billion dollars last year. In 2017, the three hurricanes Harvey, Irma and Maria alone cost 225 billion dollars – within just four weeks.

Rising sea levels: interest in real estate on the coast is falling

Much of the damage affects houses and infrastructure, such as roads, bridges and railroad tracks. It is therefore natural to ask yourself what consequences the increasing catastrophes caused by climate change will have on the real estate market.

In Florida, for example, interest in coastal real estate has declined due to the threat of rising sea levels as the polar caps melt. This was shown in a study published in October by scientists Benjamin J. Keys and Philip Mulder from the University of Pennsylvania. An example that could set a precedent and lead to significant changes, since many cities worldwide are located by the sea.

In Germany too, the risk of extreme weather events is increasingly affecting the real estate market. Because climate change threatens more frequent storms, thunderstorms, hail or heavy rain, which can lead to floods and landslides, as in 2016 in Simbach am Inn. On the other hand, extreme drought is more common, which increases the risk of forest fires. Sven Bienert, head of the competence center for sustainability in the real estate industry at the University of Regensburg, analyzed this in a study together with Peter Geiger and Maximilian Spanner.

Hail and storm cause the greatest amounts of damage in Germany. In 2018 they totaled 2.1 billion euros. According to a study by Munich Re, hail events will continue to increase in the future.

Even a big city like Berlin is threatened with water scarcity

However, the risk differs depending on the location. For example, Munich and Frankfurt am Main are more threatened by hail than Hamburg or Berlin, while in Hamburg the risk of winter storms is greater. In Brandenburg, on the other hand, there are forest fires particularly often, in the mountains such as in the Alpine region, in the Black Forest or in the Harz Mountains, heavy rain often occurs. Investors will therefore think twice about where to build a hotel, for example. In addition, entire regions could become less attractive if natural disasters occur more frequently or water becomes scarce. The latter threatens even a big city like Berlin.

But for those who build or buy their own home, such considerations are likely to play less of a role. “The question of one’s own center of life is rather defined by the seat of the employer and the family ties. In these cases, it is therefore more important to choose the ‘right’ micro-location and, in the case of a new building, to make the property as resilient as possible to the identified hazards at the location, “write the study authors. If possible, you should look for a property outside of a flood hazard or avoid an exposed location on a hill in a region with many storms.

However, the market often follows a different logic. “Our studies show, for example, that after floods in Regensburg, prices fell in the affected areas. However, it can also be stated that the longer the time elapses from an extreme weather event, this effect decreases significantly – the market likes to ignore what was a long time ago. In the case of natural hazards in particular, however, this is a deceptive security ”, the study says.

A house in St. Helena, California is on fire on September 27, 2020.

A house in St. Helena, California is on fire on September 27, 2020.

REUTERS / Stephen Lam / File Photo

However, Germany also has enough financial resources to adapt to climate change. In cities, for example, heavy rain often cannot drain off due to the soil sealing. This means that there is a risk of flooding even in areas that are far away from rivers and have not known any problems with flooding. This must be retrofitted so that the water masses can be better directed. This is the task of both the city administration and the building owners, who can protect their properties, for example, with raised entrances or pressure-tight windows.

Protection from heat, such as adequate insulation and shading, is likely to play a greater role in real estate in the future, as the number of hot days in Germany is likely to increase in the future. In some regions even for 40 days or more per year by the end of the century. However, high temperatures could also accelerate the aging of materials, which can be seen, for example, through cracks or discoloration, and lead to material fatigue. In extreme cases, long periods of heat can even lower the foundations. “Overall, it can be assumed that adequate thermal insulation will be an important factor of attractiveness in the future, something that investors and tenants will increasingly ask for,” the authors write.

A world with a temperature increase of more than four degrees is no longer insurable

Property owners can take out insurance against possible damage caused by natural disasters – including natural hazards insurance. However, rising costs due to natural disasters also lead in the medium term to higher insurance premiums and thus to rising premium payments, explain the study authors: “Construction methods in endangered locations will become more expensive and at the end of the day also affect the profitability of real estate projects or reduce their return.” Insurance company can also unilaterally terminate the contract.

The real estate industry itself is not innocent of climate change, on the contrary: It is considered to be one of the main causes of climate change and, according to the study, is responsible for almost 30 percent of greenhouse gas emissions in Germany through building and living, emphasize the study authors.

By the end of the century, the average annual temperature in Germany could increase by 3.1 to 4.7 degrees. For comparison: The extremely hot and dry years 2018, 2019 and 2020 had an average temperature of 10.2 to 10.5 degrees – and were thus about two degrees above the long-term average. Experts such as the World Bank and the German Insurance Association (GDV) expect that a world with a temperature increase of more than four degrees will no longer be insurable. This is another reason why the insurance industry has been warning of the consequences of climate change for a long time.

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