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Climate Change Turns Coastal Property Into a Junk Bond

Climate Change Turns Coastal Property Into a Junk Bond, The returns can be great, unless the investment winds up under water. Bloomberg, By  Noah Smith, May 3, 2018   “……… Even in the worst-case scenario, sea level rise will be moderate by 2050 — perhaps 1 or 2 feet along most U.S. east coast locations. And there’s a good chance it will be much less.

A rise of that magnitude doesn’t sound like a lot. But it would inundate a number of low-lying coastal areas. The National Oceanic and Atmospheric Administration’s sea level rise viewer app lets you play around with the data and look at maps. Even a moderately bad climate-change scenario could swamp some pieces of coastal real estate within a few decades.

But sea level rise isn’t a gradual, steady thing. The ocean is not a still bowl of water, but a roiling mass tossed around by winds and tides. Long before coastal areas are permanently underwater, they’ll experience increased risk of catastrophic flooding. Hurricane Harvey, which last year flooded much of the city of Houston and became the second most expensive natural disaster in U.S. history (behind another wind-induced coastal flood, 2005’s Hurricane Katrina), is probably a harbinger of more frequent storm-driven disasters.

So for the next few decades, climate change probably won’t send coastal real estate prices crashing, but it does create a tail risk for buyers. Increased probability of coastal flooding makes waterfront real estate a bit like a junk bond — something that will probably go up in value, but has a small to moderate chance of going to zero. Junk bonds generally don’t have a value of zero, but the risk of devastation definitely does depress their selling price.

Recent research confirms that the climate threat is already showing up in prices. Economists Asaf Bernstein, Matthew Gustafson and Ryan Lewis have a recent paper showing that houses exposed to sea-level rise of between 0 and 6 feet have been selling at a 7 percent discount relative to houses a similar distance from the beach that aren’t exposed. The time period they look at is 2007-2016 — before the damage from Harvey. They also confirm that the discount is higher in locations where people report more worry about climate change.

Another recent study, by environmental researchers Jesse Keenan Thomas Hill and Anurag Gumber, shows something similar. Focusing on Miami-Dade County, they show that higher-elevation locations have risen in price faster than similar locations at low elevations. That’s consistent with the theory that wealthy buyers pay a premium to escape flooding risk. High-elevation areas could also have other benefits, of course, such as increased safety from crime — but with crime down dramatically in Miami, this is a less convincing explanation of the increased elevation premium.

In fact, the price differences these economists find may be understating people’s worries about climate change, because of flood insurance. The U.S. government insures many coastal properties against floods, mostly in Texas and Florida. The National Flood Insurance Program charges below-market premiums to many of the riskiest houses, effectively subsidizing owners of the properties most vulnerable to coastal flooding.

So evidence shows that landlords, homeowners and real estate investors are now taking climate change seriously. Polls still find a big partisan gap in concern about climate change, with 67 percent of Republicans claiming that they worry only a little or not at all. But in financial markets, the reality of the phenomenon is starting to be felt.     Noah Smith at nsmith150@bloomberg.net   https://www.bloomberg.com/view/articles/2018-05-03/flood-risk-makes-coastal-real-estate-look-like-a-junk-bond

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May 4, 2018 - Posted by | business and costs, climate change, USA

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