Hazards and risks relating to climate change have the potential to substantially influence New Zealand’s property market and the industries tied to it. Here’s what might be in store for homeowners, insurers and lenders as the impacts of climate change intensify.
In 2020, much of the world was brought to a standstill by COVID-19. While New Zealand fared significantly better than other countries at eliminating the virus, many Kiwis have instead had their lives and homes affected by a series of natural disasters.
Flooding continues to be our greatest environmental hazard, with severe floods throughout 2020 plunging towns and farmland underwater and leaving homes uninhabitable in Southland, Northland and Hawke’s Bay. Last year also saw tornadoes in Auckland and Papamoa, a devastating wildfire in Lake Ōhau and a polar blast that caused severe storms, snow and hail across the country.
The financial losses from these events have been significant. According to the Insurance Council of New Zealand, insurers have paid out over $200 million to customers over the past 12 months alone1.
New challenges ahead
General consensus among the scientific community is that the frequency and severity of climate-related events will increase in the future2. In New Zealand, however, the nature of these climate risks is likely to shift, says Richard Deakin, CoreLogic NZ’s Head of Insurance Sales.
“It’s no secret that insurers are looking more closely at the natural and physical risks posed to property,” he said. “In recent years they’ve focused on earthquake risks, but now flooding and coastal risks are coming under the spotlight.”
This trend is confirmed by Dr Pierre Wiart, CoreLogic’s Head of Consultancy and Risk Management Solutions, whose work involves identifying specific locations under threat.
“Current research indicates that floods, rising sea levels and coastal erosion could become New Zealand’s main climate-related risks, with much of the West Coast, the Hutt Valley and the Kapiti Coast as regions of high impact,” he said. “Earthquakes can also amplify flood risks, through surface movements, as observed after the Christchurch earthquake in 2011.”3
More homeowners at risk
Despite warnings of floods and severe storms – and the associated rise in insurance premiums –market interest in coastal properties has remained consistently high. For instance, CoreLogic data shows that in the past five years, extreme weather concerns haven’t factored into purchase decisions for homebuyers in Dunedin, which is increasingly vulnerable to rising sea levels. On the contrary, most of the city’s properties have significantly gained in value during the same period, even in seaside suburbs4.
For now, while New Zealanders are still keen to buy at-risk properties, lenders continue to facilitate these purchases. In the future, however, it may not be viable to finance and insure properties in high-risk areas.
With the increase in climate-related hazards, particularly in coastal regions, property owners need to be financially prepared for insurance premium increases or changes to their cover. They should also be aware that property values may fall if erosion risks reach a tipping point where potential buyers can’t get a mortgage or adequate insurance.
Mr Deakin commented: “If a buyer is looking at a property with high associated risks that insurers aren’t willing to cover, they’re likely to get a polite but firm refusal from the bank, which could result in properties becoming unsaleable.”
Impacts for lenders and insurers
The New Zealand government has announced a mandatory climate-related financial disclosures regime for insurers and banks, which could be implemented as early as 2023. The proposal has the support of the Reserve Bank, which is also stepping up its supervision of climate change-related risks. This is likely to result in greater regulatory oversight and requirements for New Zealand’s banking and insurance industries5.
Meanwhile, as more properties become impacted by extreme weather events, insurers will have an important role to play in helping homeowners understand these threats and develop appropriate mitigation strategies. But as the severity of these events grows, the risk of property damage may also drive substantial changes to insurance policies and pricing.
“Insurers will monitor weather events more closely and make cover decisions based on their estimated risks, leading to potential insurance retreat,” said Mr Deakin. “This doesn’t necessarily mean a complete lack of cover, but it could take the form of increased premiums and excesses, or exclusions for specific events.”
If homeowners can no longer afford suitable insurance or they’re forced to cancel their cover, this could have a knock-on effect on their ability to service their home loan.
“Adequate insurance is a requirement for a mortgage,” Mr Deakin said. “While banks aren’t likely to demand instant repayments or mortgagee sales, they may look at reducing the term of the loan with a corresponding increase in mortgage payments.”
Taking a solutions-based approach
A better understanding of environmental hazards can help property professionals and their clients assessing natural perils and manage their risks.
CoreLogic has recently partnered with Ambiental to produce high-resolution hydrological modelling, designed to help insurers accurately assess flood risks in their portfolio and adjust policy pricing accordingly. New Zealand FloodMap and FloodScore provide the country’s most complete view of flood risk, incorporating spatial data and detailed insights around return periods and predefined risk scores.
CoreLogic has also formed a strategic climate risk solution alliance with Munich RE to develop superior visualisation, mapping and reporting capabilities. Our global datasets and predictive climate risk models offer an unparalleled property-level view of climate risks, along with multiple climate scenarios to inform underwriting strategies.
To find out how CoreLogic's tools and services can help you and your clients assess and manage climate risks, contact your CoreLogic account manager today or send an enquiry.
1 Insurance Council of New Zealand, Insurers pay more than $200m to help customers recovery from 2020’s severe weather, December 2020.
2 US Global Change Research Program, Fourth national climate assessment, 2017.
3 Effects of Earthquakes on Flood Hazards: A Case Study From Christchurch, New Zealand. M. Quigley and B. Duffy, 10(3), 114, Geosciences 2020.
4 CoreLogic NZ
5 Reserve Bank of New Zealand, Disclosure and supervision of climate-related risks, November 2020.