Reserve Bank partners in investigation of the impact of climate risk on property prices.
Strand Marsden is Royal Society-funded and also counts the Reserve Bank among its partners.
The project is trying to establish how prices will change once the market does react, and how exposed the banking sector is.
For the last seven months, Ivan Diaz-Rainey and a team of hydrogeologists, climate scientists, and financial experts have been quietly working away on the project.
The team has been given $869,000 and three years to study how climate change-linked flooding is likely to affect New Zealand property, and how regularly flooding has to occur before a home becomes unmortgageable and its value plummets to zero.
The team has already conducted a study in Dunedin, which saw severe flooding in 2015, using different models to see how water finds a level in different landscapes and among different ground materials.
South Dunedin also allows a first glimpse into how market prices react. Diaz-Rainey says immediately post-flooding, house prices fell on average 15 per cent.
Prices have since recovered, but buyers still get about a 5 per cent discount if looking in the vulnerable areas.
Diaz-Rainey says current pricing models wait for permanent flooding (a house being below the risen sea level) before the prices drop to zero, but the Strand team predicts this collapse happens well before, as water levels rise and smaller and smaller rainfalls result in flooding.
To put the country’s banking sector’s exposure in perspective, Diaz-Rainey says 85 per cent of New Zealanders’ wealth is tied to real estate, and 60 per cent of large banks’ loans are on domestic real estates.
“We all live near the coast – you put all those things together, and you think this might be a big risk,” he says. “We have a lot of our eggs in one basket.”
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