Cottage with a catastrophic view
By Tomasz Konicz
[This article posted on September 14, 2023 is translated from the German on the Internet, https://www.konicz.info/2023/09/14/haeuschen-mit-katastrophenblick/.]
Storms, forest fires, rising sea levels: global warming leads to high financial risks for real estate investments. Coastal regions such as Florida are at risk of losing billions.
In the end, the storm was less devastating than feared. On Wednesday last week, Hurricane Idalia hit the Florida coast with heavy gusts of wind and torrential rain. It uprooted trees and destroyed houses, leaving over 200,000 people without power at times. However, the storm mainly devastated less densely populated areas.
Just under a year ago, things were less benign. Hurricane Ian claimed over 150 lives and caused property damage amounting to 112 billion US dollars across the country. For Florida, which was hit particularly hard, it was the costliest storm in the state's history.
The frequency of such storms is increasing due to global warming. And with it the financial damage they cause, especially in densely populated coastal regions such as Florida. This also has an impact on the real estate market. For decades, the picturesque seaside luxury properties in Miami Beach and the surrounding Miami-Dade County, for example, were particularly sought-after. At times of major real estate speculation bubbles - in the 1980s and the first decade of the 21st century - enormous price increases were achieved here.
Nowadays, cities such as Miami, which are located close to sea level, provide illustrative material for the interaction between ecological and economic crises. Not only are storms occurring more frequently, but periodic flooding of coastal streets and neighborhoods is becoming an increasingly serious problem due to rising sea levels and rising water tables. Cities in Florida are already investing in water pumps, the elevation of roads and the renaturation of flooded areas.
The recent boom on the US real estate market, which was driven by the expansive monetary policy of the central banks, has already been overshadowed in Florida by the increasingly apparent consequences of the climate crisis. Home sales in regions of Florida particularly affected by sea level rise, such as Bal Harbour in the north of Miami Beach, fell by half between 2013 and 2018. Between 2016 and 2020, prices in these luxury neighborhoods, where single-family homes were sold for an average of USD 3.6 million just a few years ago, also fell by 7.6 percent. Other particularly vulnerable regions such as Key Biscayne or Sunny Isles Beach saw prices fall by up to 13 percent in the same period.
And that was just the beginning. According to various forecasts, between 300,000 and 1.9 million coastal properties in the USA will be affected by "regular flooding" in the coming decades. By 2100, the city center of Miami and large parts of Miami-Dade County are likely to be permanently below sea level - along with real estate currently worth 400 billion US dollars.
In recent decades, speculative bubbles - particularly in the form of real estate bubbles - have been an important driver of the economy for the production of goods, which has been stifled by its productivity. At the same time, the ecological crisis worsened during this period. In Florida's real estate market, the late neoliberal bubble economy and the capitalist climate crisis are mutually reinforcing each other; at the local level, the internal and external barriers to capital are being felt here: rising sea levels and more devastating storms threaten to devalue real estate - and a climate-induced collapse of the real estate market would, at least in the affected regions, weigh on the economy.
According to some forecasts, the expected effects of the climate crisis on the real estate market are far from being priced in. In February, the Washington Post reported on a scientific study according to which the market price of real estate in at-risk regions nationwide would have to fall by a total of USD 121 to 237 billion in order to adequately reflect the climate risks - which would amount to a gigantic real estate crash induced by climate change. In addition to Florida, Louisiana, North Carolina, New York and New Jersey would also be affected. A calculation from last year even assumes climate-related losses in value of up to 520 billion US dollars, meaning that 3.5 million homeowners in the risk areas of the USA would have to accept a price drop of "more than ten percent".
In addition to real estate dealers, insurance companies are particularly affected by the increasing storm risks. Because storms are becoming more frequent and more devastating in Florida, some insurance companies have already restricted their offers for property owners in the state. There are similar developments in California, for example, where the insurance company State Farm announced in June that it would no longer insure properties, citing the increased risk of forest fires. At the end of August, United Services Automobile Association (USAA), another insurance group, announced that it would be severely restricting the issuing of property insurance in California due to the increase in wildfires.
Other insurers see profit opportunities in the increasing storm risks. The New York Times reported that some companies are bucking the industry trend and expanding their offerings in Florida - because the average insurance premium for homeowners has now risen to a lucrative USD 6,000 per year. However, more and more property owners in the USA are saving on their insurance. Last year, only 60 percent of the damage caused nationwide by storms, drought and forest fires was covered by insurance.
The problem of rising premiums is also evident in Europe. Two years ago, the reinsurer Swiss Re predicted that insured weather-related catastrophe losses would increase by 30 to 63 percent by 2040 in most "developed markets", and by as much as 90 percent in Germany. Last June, the German Insurance Association (GDV) warned of a "price shock" for building insurance.
Premiums could double over the next ten years. This would not only affect homeowners, but also tenants. In addition, although most property owners in Germany are insured against storm damage, only just under half are insured against other so-called natural hazards, such as flooding or landslides. In August, following severe storms in Germany, several state premiers therefore called for natural hazard insurance to be made compulsory.
Despite these effects of the climate crisis, experts expect property prices to rise sharply worldwide in the coming years. The Munich-based Ifo Institute forecasts an annual increase of nine percent over the next ten years. Population growth and rising living standards are expected to lead to double-digit price increases, particularly in South and West Asia. Even in North America and Western Europe, growth is expected to amount to 7.7 and 6.4 percent per year respectively.
And even in those regions that are particularly threatened by climate damage, there is business potential, for example through the gentrification of districts and regions in line with climate-related risks. Miami is also a pioneer here, as US media reported back in 2018, citing relevant studies.
A study of real estate prices over the past 45 years in the greater Miami area found a clear correlation between price trends and the height of properties above sea level: the higher the location, the higher the price. According to the study, prices in vulnerable coastal regions would have been ten percent higher without the risks posed by climate change. According to the forecasts, population growth and "speculative real estate investments" will increase in the future, particularly in the higher locations of the metropolitan area, which will accelerate the price increase. As a result, investors are already displacing "socially disadvantaged residents from high-lying districts such as Little Haiti".
Such displacement is an example of how a changing climate can transform social maps in cities and affected regions: The poor are pushed into areas that are particularly vulnerable to extreme weather events. These can be not only tropical storms and floods, but also forest fires or simply heat, for example.
The online magazine Insider (formerly Business Insider) reported that Minneapolis in Minnesota is one of the cities in the country with the greatest inner-city temperature differences between the cooler, wealthy parts of the city and the hotter, poor parts. In extreme cases, it can be as high as eleven degrees Fahrenheit. The concentration of polluting industry and the lack of green spaces in the impoverished districts contribute to this huge discrepancy. Because the city is still characterized by the discriminatory division of the city into wealthy neighborhoods and ghetto districts for blacks and predominantly non-white people (so-called "redlining"), minorities are disproportionately affected by heat and pollution.