What climate change means for coastal property values

What climate change means for coastal property values

Climate change has a real impact on the property market, particularly in coastal areas. The rising sea levels and warming oceans have already led to a significant loss of east coast property values, from Maine to Florida. Property owners and investors have many things to consider when it comes coastal property. From a property’s appreciation rate to the possibility of extreme weather damage to local resilience measures.

Smart investors weigh the risks and ROI, as well as the elevations of the area to determine the best places to purchase property. This post will discuss what you should consider before investing in coastal communities, and what you need to remember when managing your properties.

What is the current state of coastal property appreciation rates?

According to the 2017 federal Climate Report, the sea level has risen eight inches since 1900. The pace of this rise is increasing. Three inches have been gained since 1993. It may not seem much, but cities that are built near the sea can be affected by this. Models predict that the ocean could rise up to 7 inches in the next 30 years and possibly even 4.3 feet. This means some of your favorite spots may be underwater sooner than expected.

Underwater is a study by the Union of Concerned Scientists that estimates that a staggering $1.07 trillion in property value is at risk due to its exposure to an encroaching coast. The study also predicted that 300,000 residential or commercial properties would face frequent and disruptive flooding in 2045. This will result in $135 billion worth of property damage. 280,000 Americans may be forced to relocate or adapt to the new situation.

Real estate values have declined significantly in many coastal communities due to frequent flooding caused by tides, rising sea levels, and the proximity of waterways. The First Street Foundation reports that “Among the 17 States analyzed so far, Florida has experienced the greatest loss of relative home values with $5.4 billion. New Jersey is second at $4.5 billion and New York comes in third at $1.3 billion. Ocean City, New Jersey, Miami Beach, Florida, and Charleston, South Carolina, saw the largest losses in relative property values.”

Washington Post reports that “by comparing properties virtually identical except for their exposure to seas, researchers at University of Colorado at Boulder, and Pennsylvania State University, found that vulnerable houses sold for 6.6 per cent less than homes that were not exposed.” The study found that the most vulnerable homes — those that could be flooded if sea levels rise just one foot — sold at a discount of 14.7 percent.

This doesn’t mean that property values have decreased. Even in areas with repeated flooding or greater exposure to the elements, home prices continue to rise, although at a slower pace. These losses are accounted for by the data of the First Street Foundation, as is the sharp drop in the appreciation rate.

Researchers at Harvard University have published a paper which shows that homes in higher elevations appreciate faster than those at lower elevations. The phenomenon was called “climate-gentrification”. In the First Street Foundation Report, they gave an extreme example of a Boston, MA house valued at $373.725, which would be worth $800K at a higher altitude. A woman in South Carolina decided to tear down her historic house after she was unable to sell despite 11 price reductions. She had to repair the damage caused by one flood after another, so decided to demolish the house and sell it without the structure. This would allow future owners to build a home higher up to protect themselves from rising tides.

Water-damaged homes also sell slower, as there is a greater risk of structural damage and mould growth. This means that the homeowner will need to do more repairs when they buy the house, as well as preventative maintenance and frequent repairs following weather events. Investors and homeowners can find out the flood risk of a property by visiting FloodIQ. This website uses scientific data and models from NOAA and other sources, including United States Geological Survey (USGS), National Weather Service (NWS), US Army Corps of Engineers and Columbia University, to evaluate investment, risk and dangers of flooding and storms.

Extreme weather events: Risk factors

Aside from “sunny-day flooding” (flooding caused by high tide and not storms), coastal communities are more susceptible to extreme weather conditions. Though it is impossible to know when or where these extreme weather events will occur, they are happening more often and causing more damage.

Hurricanes Harvey, Irma and Maria caused over 3,000 fatalities and nearly $300 billion in damage. Why? Conditions in the air, and water that are warmer will produce stronger storms. The warmer the water is, the stronger the storm. And the hotter the air, it can hold more water.

The rising seas and warming waters will intensify hurricanes. They will also cause storm surges to be stronger, and the rate at which flooded areas drain slower. Property owners and investors are able to better manage natural disasters by using the right insurance and underwriting. As long as coastal communities continue to attract residents, property owners can expect renters. Tenants get the benefits of living in an attractive area without taking on the risk.

Financial and Insurance Considerations

Investors also need to consider speculative expenses. Flood insurance and repairs are required for coastal properties. Even inland properties and those at higher altitudes can be at risk. The risks (and costs) will change with the rising seas. Models predict that sea levels will rise by 3-7 inches in 2030. This is within the timeframe of a 30 year mortgage.

We recommend that investors conduct research before purchasing coastal property. John Macomber is a Harvard Business School Professor with a career in the real estate industry. He told propmodo that he thinks a lot about probability. The first thing to do is look at the range estimates, such as the Unified Sea Level Rise Projection from the Southeast Florida Regional Compact…Secondly, the insurance industry pays close attention to probabilities and risks. The exceedance graph is the main tool for calculating probabilities. The curve considers the likelihood of an event resulting in a loss and the economic impact if it occurs. This curve reflects a high probability for a low damage event and a lower probability for a high damage event.

Investors can use these curves to help them decide whether or not to buy (or sell/keep) coastal property. Investors should compare the cost and probability of flooding today compared to the future. There is no need to be alarmist at this time, but coastal property decisions should be given more consideration. Investors should be proactive in negotiating lower prices for coastal property, making resilience upgrades, finding solutions to reduce recovery costs, and working with local experts who know the market well.

The cost of insurance for coastal properties has not risen dramatically. Although coastal home insurance is more expensive and some require additional policies, the prices have not increased. Flood insurance is largely arranged by the National Flood Insurance Program, which is heavily subsidised through FEMA. Congress funds it year after year. Due to repeated billion-dollar-storms, the program currently carries a 20.5 billion-dollar-debt. This is not sustainable for future storms of this magnitude. FEMA’s flooding plains are assessed every five years, but they don’t account for increasingly severe and heavier storms.

FEMA has developed the Coastal Hazard Analysis Modeling Program to assist owners in assessing risk. Flood insurance could be changed as the likelihood of flooding increases. This is especially true in areas where flooding occurs frequently. The general insurance industry does not look ahead, because it is determined by the current risks and not future potential. Modeling the future change in insurance prices is impossible and unrealistic.

Climate Change and Property Taxes

Cities are beginning to realize that protecting infrastructure and residents’ properties can be expensive. Miami has invested $200 million to upgrade infrastructure and install pump stations. Miami Beach plans to double this amount by building seawalls and raising sidewalks. Maine passed a $106,000,000 bond to upgrade the water and land transport systems. Voters have chosen to increase their own property tax to protect their properties.

Taxpayers are spending a lot to ensure their own resilience. Taxes will increase as federal, state and local governments upgrade resilience measures. You want your property to be safe as an investor or owner, but these costs will also fall on you. On the other hand, if property values in coastal towns are declining, then residents will start to leave. This means that towns have less revenue to spend on infrastructure and property.

How should owners and investors handle coastal and waterfront property?

In spite of the increasing concerns about flooding, sea level rise, extreme weather events, and their destruction, coastal construction continues and property values are rising (though more slowly). Beachfront properties are still very desirable. More attention is paid to the construction of reinforced, resilient houses with flood barriers, waterproofed electrical system, relocated ductwork and generators on second floors.

  1. Enter your current property values, mortgage, rent expected, cost of improvements, sale price and value of land.
  2. Map the risk of sea level rising, exposure/vulnerability to water, and costs of mitigation and repair. When estimating the land value and sale price, you’ll need to pay particular attention to these details.
  3. As a taxpayer, you need to know what your responsibilities are as a landowner. Engage with local policymakers to discuss resilience strategies. You don’t want your investment to be ruined by a reaction.
  4. Talk to a property management company about your risks and mitigation strategies. Property managers can assist you in setting fair market rents to absorb certain risks, prepare the property for disasters, implement solutions for damage and educate residents on how to deal with storms and flooding.

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