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Coastal Homes in Florida Lose Value

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Coastal Homes in Florida Lose Value as Seas Rise

By: Adam M. Matheny

Flood Risk Increasing

The conclusion of a pair of recent reports calculate just how much climate change will impact Florida’s real estate industry… and it isn’t pretty.

International consulting guru McKinsey released a report that found Florida homes that are at risk of flooding could lose 5%-15% of their value over the next decade. This of course bars any massive changes to the market during that time.

By 2050, this could rise up to 15%-35%.

A second Miami-Dade focused report through Jupiter Intelligence states that moderate flooding (12 inches) will affect close to double the number of homes by 2050.

These reports bring to light a new topic in the financial world called climate risk, explaining all the ways that our warming planet will tamper with global financial systems.

Premiums Will Rise With the Sea

First off, the insurance market will need to adapt to the actual cost of insuring properties that are facing a much higher risk of strong hurricanes and flooding. This amounts to higher premiums for flood and windstorm insurance. Once banks realize that a home facing the literal chance of going underwater, mortgages may be more expensive to get.

The onslaught of floods or storms could make buyers—both regular homeowners and mega investors—steer clear of vulnerable properties, which will further drop the value.

A sizeable chunk of local and state budgets are comprised of property values and the associated taxes. This means municipalities who are meant to protect residents from catastrophic events will have less funding to do so.

Some are likening the coming market shift due to climate change to the mortgage crises from a decade ago.

Principle for Responsible Investment, a UN-backed group with more than 500 global asset managers as members, warn of a “response by 2025.”

“It’s going to be a slow process and we’re starting it now,” warns Nidia Martinez, director of climate risk analytics at global risk management and insurance firms Willis Towers Watson.

Rich Sorkin, head of Jupiter Intelligence, says he gets this question all the time. “Is South Florida doomed?” His response is that it’s not—for a few reasons.

He points out only certain spots of the region are at risk. Bal Harbour and other coastal communities are more likely to lose value than high ground spots like Miami Gardens. And because foreign investment takes up a huge chunk of the real estate market, higher end properties may be padded against price changes.

Also, lots of South Florida cities are doing their part in standing up against potential catastrophe by building new sea walls, pumps, and raised roads. Miami Beach is investing in stormwater pumps all across the island and taking a closer look at its stormwater system to decide where best to direct resources.

Risk Rating is Changing

Another impact to consider: rising insurance premiums as companies adjust their rates to account for the sea level rising.

The National Flood Insurance Program (NFIP), responsible for 35% of all Floridan policies, is re-evaluating its rates to reflect risks in 2021. The process is called Risk Rating 2.0.

This all applies to hurricane insurance, too. The models don’t include the latest climate change science that shows hurricanes becoming more intense. Anyone who relies on their insurance for a proxy for risks 10 to 20 years out is just “standing on sand,” according to Sorkin.

Jupiter’s analysis showed the expected losses on mortgages in Miami-Dade County could rise from 1.24% in 2019 to 1.97% in 2050. That seems small, but they represent a big shift for home buyers. The higher the number, the more a bank will charge for mortgage interest.

How will Florida Survive

So, how can South Florida survive a financial crisis from climate change?

All experts point to the same: invest in resilient infrastructure, build smarter and stronger, slowly raise insurance rates, stop development in risky areas, and getting all residents on board for changes that have to take place.

Sorkin points out that unless a high percentage of voters make this their top priority, it will be difficult for cities, counties, and the country itself to get the money needed to combat climate risks and the financial threats it poses.

The better solution? Slow down the physical effects of climate change by pumping fewer harmful emissions into our atmosphere. This will deter the longer-term impacts of climate change, but we won’t see the positive effects for a few years, yet. Scientists say the immediate environmental changes are locked into the system, thanks to decades of climate pollution.

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