Property investment: Climate change will affect valuation
When I was small (yea, that was a long time ago), maybe around 5-6 years old, I remember every year, my late grandmother and grandfather’s home in Teluk Intan would be flooded. They would be moving items to higher areas in the home while I would be asked to sit and do not move on top of the dinner table. Their home was just beside Sungai Perak.
My own home in Teluk Intan which is still owned by my parents today could also be flooded every year. The price of the semi-detached home has increased but I think it’s following the typical inflation rate . I like that home and I told my parents if they ever wanted to sell the place, I would like to take over it. Perhaps turning it into an AirBnB place? We shall see, no rush at the moment.
Now, we look at an advanced property market and what happened when climate changes and wild weather happens.
Article in nst.com.my RBA economists Kellie Bellrose, David Norman and Michelle Royters said in a research paper that some property in parts of Australia exposed to climate change and wild weather could experience valuation declines and this will leave lenders with less protection in the event of a default.
They wrote, “Climate change creates risks for the Australian financial system that will rise over time to become substantial if they are not properly managed.”
“If current values do not fully reflect the longer-term risks of climate change, housing prices could decline, leaving banks with less protection than expected against borrower default.” Article in nst.com.my
What is less protection in the event of a default?
Banks lend to borrowers who buy properties. If borrowers could not pay, then bank will take back the property and auction if off to pay for the amount of default. If the bank could only sell the property for lower than the amount which was owed, the bank will lose money with every default. Now imagine if 50% of all your loans were to home purchase and 10% of these loans defaulted… This is what is meant by less protection in the event of a default.
Learning from this research for property investment by RBA?
Properties we buy, we have to do enough due diligence on whether flood occurs on a yearly basis… whether there has been way too many cases of water shortages… and even if there has been landslides or any other natural calamity which would continue to affect the property we bought.
If it’s for our home and it’s like 2 minutes away from our parents’ home (and we go there for dinner every evening), then we have no choice but to still buy it. However, if it’s for property investment, then it may be wiser to check out and then to calculate this into the property price as well.
Remember, if there are other choices nearby, then your property price will be subdued no matter what happens because no one wants to buy a home which gets flooded every year without fail. It will increase with the inflation but it may still be below market valuation. Happy evaluating diligently when it is a property investment.
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