pietillidie wrote:We could probably do with a finance/economy thread, but I'll put this here because of Trump's acceleration of the problem, and complete inattention to risk management.
I don't know enough about the topic to comment either way, but here's how one finance specialist at Harvard Business School reasons his way from an increase in climate disasters to another housing-based financial crisis. Great!
You’ve been warning for years that America’s housing market has been ignoring the risk of perils associated with climate change. Do you believe we are approaching a correction?
Yes. Damage from climate change has accelerated faster than many people anticipated. In USA in 2020, there were 16 weather/climate disaster events with losses exceeding $1 billion each (some much larger). The average from 2015 to 2019 was 13.8 such events. The average for the 40 years prior to 2020 was 6.6. What’s more, we are seeing risks we didn’t foresee just a few years ago. We’ve been rightly worried about coastal flooding from sea-level rise but in the last several years there’s also been an increase in river flooding from rain and huge damage from wildfires.
Among other issues, we haven’t faced the tough question of whether people should be restricted from building or rebuilding in these places that are, in the example of California, natural fire corridors that have been recognized for centuries. Instead, in California we’ve required utilities to bring power to homes in these dangerous areas, and now the state is mandating that insurance companies renew fire policies at below-market rates. Similarly, in parts of the east coast, private insurers have long since exited the homeowner flood risk market and instead the coverage is provided with deeply subsidized premiums by state agencies relying on the National Flood Insurance Program.
This is a classic market distortion.
Indeed. It encourages people to make or maintain housing investments that are exposed to more danger than they realize. For now, governmental entities absorb the extra cost of these risks when they repair or rebuild these homes (using the tax receipts from other property owners, by the way).
Insuring, repairing, and rebuilding properties that really are uninsurable has artificially inflated home prices by papering over this risk pricing gap. In the short run many parties benefit from propping up housing prices, but with increased exposure to peril and further tightening of government budgets this cash-hemorrhaging system cannot endure. The question is whether it’s going to settle out slowly or settle out fast. My concern is that all of a sudden it just snaps and there’s this giant reset that leads to a real disruption in housing prices.
Take us through that scenario.
The optimistic scenario is that a gradual sea level rise or a slight increase in fires will lead to gradual declines (or relatively slower appreciation) in house prices. The broader system has time to adjust.
The greater worry is that insurance premium support will suddenly dry up, and at the same time mortgage underwriters will start to factor in the substantial danger of these exposures. The result will be a dramatic consequent rise in insurance premiums, coupled with a reduction in mortgage loan-to-value ratios (and at worst the complete inability to buy fire and flood insurance at all, or to refinance a mortgage). Housing prices will plummet in these areas. For many homeowners the equity in their property is their biggest asset. It’s a real problem if that asset declines in value or even goes negative (if you owe more on your house than its risk-adjusted value).
This scenario will result in a second circle of trouble. Most American municipalities get the bulk of their revenue from property taxes. Property taxes are tied to the value of homes and commercial real estate. If home values fall, then property tax receipts fall without a simultaneous reduction in a city or town’s expenses, so their ability to service their municipal bonds becomes imperiled. That could lead to the ratings of the bonds being downgraded. That puts cities and towns under cost-cutting pressure, which then leads to other stresses on government services. It also increases their cost of borrowing, with both factors leading to a downward spiral.
A knock-on effect will be a potential decline in the ratings and value of certain bonds. Tax-advantaged fixed-income instruments, such as municipal bonds, are a big part of many people’s retirement portfolios (and many insurance companies’ reserves). I argue, then, that this aspect of climate risk touches everyone’s pocketbook.
https://hbr.org/2020/12/are-we-on-the-v ... ial-crisis
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I’d say that’s not just a US problem, I’ve heard people hear whinge about the cost of insurance in certain rural areas, but just like a car, if you drive a sparkly look at me expensive steal me car, your premiums will be higher. If the chance of a flood or fire is 25% higher so will your premium be. In saying that, tornado alley fascinates me, while seeing nature like that is amazing, I don’t think I could live there, and yes I know it’s a massive massive area, same goes for places like New Orleans, so much of it is below sea level.
As for the above, did Trump mandate anything in particular to make this worse? The fire corridor thing should be common sense. Aside from money, the risk to emergency workers, even if just checking they are clear, crazy. At the very least they should have fire proof bunkers, and if you can’t afford that, you can’t afford to live there. A lot of an insurance premium is through the cost of false or dodgy claims.
