Climate risk is a pressing issue that poses significant threats to communities and economies around the world, with the increased risk of flooding being one of the most significant impacts. Rising sea levels, more frequent and intense storms, as well as increased precipitation can lead to more frequent and severe flooding, which poses a risk to human safety and property. It can also have a significant impact on property values. In a previous blog, we found that buyers are increasingly aware of flood risk evidenced by home price drops as flood risk went up. CoreLogic projects more than 1.2 feet of sea level rise at several Miami locations in 2050 under a high-emissions climate risk scenario.
To mitigate these risks, it is important to clearly understand the potential impacts of climate change on property values. CoreLogic’s Climate Risk Analytics uses scenarios created by the Intergovernmental Panel on Climate Change (IPCC) to provide a comprehensive framework for exploring the potential impacts of climate change on properties. One solution provided is a composite flood risk score assigned to each property based on flash flood risk, storm surge and inland flood risk under various IPCC scenarios. In this blog, we will quantify how a stressed climate scenario, RCP8.5, can negatively affect property value.
RCP8.5 is a severe scenario developed by the IPCC that represents a future in which greenhouse gas emissions continue to increase at a high rate, leading to a significant increase in global temperature, rising sea levels and more extreme weather events. Under this scenario, global warming is projected to reach 4.5 to 5.5 degrees Celsius above pre-industrial levels by the end of the 21st century, resulting in more severe heat waves, droughts and storms, as well as a sea level rise of up to one meter. This scenario would significantly impact coastal areas where flooding and storm surges would become more frequent and severe.
Figure 1 illustrates the impact of the RCP8.5 scenario on composite flood risk. As seen in the chart, properties located near the coast are particularly vulnerable to the effects of sea level increase. The increase in composite flood risk is significant, with many properties experiencing a substantial increase in risk under this scenario. It is important to note that this increase in risk is not limited to just properties located near the coast but also to properties located further inland that are at risk of flash flooding and riverine flooding. The comparison of the composite flood risk score under the base scenario and the RCP8.5 scenario illustrates the significant increase in risk properties face under the RCP8.5 scenario. As outlined earlier, it is crucial to clearly understand the potential impact of climate change on property values and to implement strategies to mitigate the risk and safeguard property values.
Figure 1: How the flood risk may increase under a severe climate risk scenario RCP8.5
A hedonic model was employed to analyze the effect of flood risk on property values by regressing price per square foot on the composite flood risk score under the base scenario while controlling for other factors such as location and time dimensions. We then used this model to predict property values under the RCP8.5 scenario, which represents a severe climate change scenario, by applying the RCP8.5 score in the regression. By comparing the potential impacts of a severe climate risk scenario with the base scenario on property values, property owners, investors lenders, servicers and insurers can take steps to mitigate the risk and protect property values. This can include investing in flood protection measures, purchasing flood insurance or even relocating assets to safer areas.
Figure 2: Average percentage change between the base and RCP8.5 scenarios across flood zones
Figure 2 illustrates the increase in composite flood risk score from the base scenario to the RCP8.5 scenario by flood zone, as well as the corresponding potential property value loss under the RCP8.5. In this analysis, properties located outside of the existing 100-year flood zones are particularly vulnerable to the effects of sea level rise, experiencing an average property value loss of 2.8%. Properties located in 500-year flood zone also suffer a significant property value loss of 2.3%. Flood zones AE and VE will have a high loss of 1.74% and 1.56%, respectively. Our analysis estimates that all residential properties in Miami, valued at over $387 billion, will experience a loss of $7.9 billion under the RCP8.5 scenario. Moreover, it is estimated that 70% of this loss will be from 25% of the properties.
Figure 3: Value loss per property by flood zones
In Miami, there are approximately 730,000 residential properties. According to Figure 3, the average loss per property under the RCP8.5, a severe climate scenario, is estimated to be $10,860. Properties situated outside of the 100-year floodplain, Zone X and X500, are likely to experience higher losses of $14,647 and $12,169 per property, respectively. This is partially due to the fact that homeowners may not be aware of the looming risk since their knowledge is based on experience. Moreover, Zone AE and VE properties will have high losses of $11,414 and $13,126, respectively, due to their proximity to the water, which commands a higher home price, making them more vulnerable to the impacts of sea level rise.
In summary, CoreLogic’s Climate Risk Analytics provides a comprehensive solution for understanding and mitigating the risks associated with climate change under various IPCC scenarios. By quantifying the effects of various climate change scenarios on property values, actionable insights are provided for homeowners, mortgage lenders, insurers and policymakers. Looking ahead, we will expand our analysis to other perils and the combined climate risk.
Rajendra Anjanappa and Manjunath Halemane contributed to this blog.