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Property values ​​are at risk in hotspots for climate change, warns RBA

Property values ​​are at risk in hotspots for climate change, warns RBA

Properties in parts of Australia exposed to climate change and wild weather may experience declining valuations, leaving banks with less protection in the event of a default, according to Reserve Bank investigations.

About 3.5 per cent of homes in Australia already fall under an international definition of being at “high risk” due to climate damage, RBA economists Kellie Bellrose, David Norman and Michelle Royters said in a research article.

But RBA economists note that it is the rise in climate risk that is not yet reflected in property prices that is crucial when considering banks’ exposures in climate-sensitive regions.

Rising sea levels, eroding beaches: Climate change could deliver a significant hit to property values ​​in affected areas, the RBA says.Credit:Nick Moir

The problem may be acute in Australia, the world’s driest inhabited continent, as mortgages make up about two-thirds of major banks’ portfolios, according to research.

“Climate change creates risks for the Australian financial system that will increase significantly over time if not managed properly,” they wrote. “If current values ​​do not fully reflect the long-term risks of climate change, house prices may fall, leaving banks with less protection than expected from borrower default.”

The regions are expected to see the largest increase in the proportion of properties at high risk until 2050, including highly populated areas in south-eastern Queensland and northern NSW, which have a large number of houses at risk of coastal flow.

‘Climate change creates risks for the Australian financial system that will increase significantly over time if not managed properly.’

RBA economists

To estimate the potential impact of climate change on mortgage books, the researchers translated estimated declines in house prices in climate-sensitive suburbs by 2050 into an implicit change in borrower leverage, measured by loan-to-value ratios.

The result suggests that climate change will result in about 400,000 more loans or 2.5 percent of all loans having a loan-to-value ratio of over 80 percent. Within this, about half move to more than 90 per cent.

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