Climate change – a threatening problem for lenders

A looming problem for mortgage advisers over the next few years and coming decades is going to be property insurance, Mark Solomon, LifeDirect managing director says.

Thursday, November 21st 2024, 9:06AM

In Australia, Climate Valuation, a company that assesses the future risk to houses and property from climate change, thinks it is now a matter of weeks and months before mortgage lenders start to refuse to lend mortgages on these properties.

It does a lot of work for insurance companies and banks and must give them the unvarnished view of which properties are a material risk to their portfolios.

The company’s chief executive Karl Mallon says for places that will be hit by rising seas, bushfires, or other extremes, the problems are going to set in long before most are physically impacted.

“Many home buyers don’t realise just how seriously lenders and insurers are taking climate risk.

“Thousands of properties are being checked every year, so we know home buyers are paying attention, [and] we think it’s only a matter of time before the values start to reflect that,” he says.

Is New Zealand headed the same way?

Australia’s big four banks operating in New Zealand only approve a mortgage on a property if it is adequately insured.

Solomon says just because a property is currently insured does not mean that the homeowner is guaranteed to get continuation of cover.

“It could become a massive problem for New Zealanders either in flood affected areas or earthquake prone areas. Wellington and Hawkes Bay have a lot of those areas.”

Insurance retreat over time from some locations is already being looked at as increasing levels of damage - especially from floods and coastal erosion - make selling cover in those locations "unattractive or infeasible".

“If insurers or reinsurers see that these are high risk areas, then they could definitely pull out,” Solomon says.

Banks are equally exposed to the risk, so there is a domino effect leading to a next scenario that could involve pulling the rug from under mortgage holders. “It could be a big problem in the next few decades if the weather gets worse,” he says.

Work underway by banks

New Zealand’s banks, so far, are standing by people in flood-prone homes who have home loans with them because obtaining insurance cover is a condition of a mortgage with “no exceptions”.

ASB says while it has work under way to better understand the impacts of climate risks such as flooding on home lending, access to robust climate data remains a significant industry challenge.

It wants a coordinated, customer-centric approach to climate risk, bringing together the banking and insurance sectors with local and central government and supported by national policies and guidance.

Westpac’s 2023 Climate Risk Report says: “While a sudden wholesale insurance withdrawal from high-risk area appears highly unlikely, Westpac NZ still expects insurance costs to increase over the next five years. Insurance withdrawal from some locations most at risk could occur in the next five years.”

The bank says it is “exploring ways to integrate climate-related risks into residential mortgage lending”.

Mallon says Climate Valuation has had “very encouraging” discussions with banks about lending money to homeowners to make their houses more resilient to things like seawater inundation.

“That’s a win for everybody – the home buyer is a winner, the insurer is a winner, the bank’s a winner.

Insurance premiums

A new report shows an estimated 10,000 coastal properties in Auckland, Wellington, Christchurch, and Dunedin could become uninsurable by 2050, due to coastal erosion and inundation.

The report Premiums Under Pressure, by the Helen Clark Foundation and engineering consultants WSP warns that without intervention, the country is facing steep rises in insurance premiums, with insurers likely to withdraw flood coverage altogether for the most at-risk properties.

Government intervention is being called for, including the development of a residential flood insurance scheme, similar to arrangements seen in the UK and France.

This could include homes that are unable to access private insurance but were still within a risk threshold, homes in areas where insurance has been withdrawn because of risk, and homes that are facing a future process of planned relocation, and require cover in the interim.

Tags: Climate Change