Canada's real estate sector needs to own up to climate risks

One of the many homes damaged during flooding in Bracebridge, Ontario last spring. Photo by Robert Hilscher.

A week after Hurricane Dorian barrelled toward the east coast of Canada, the full cost of damage to homes and properties up and down the Atlantic coast is still unknown. What we do know is that the climate crisis is making extreme weather events like hurricanes more destructive. It’s also significantly impacting real estate markets across Canada.

From wildfires in B.C.’s interior and Alberta to headline-grabbing flooding in Ottawa-Gatineau, Muskoka and New Brunswick in 2019 alone, properties across the country are feeling the heat of the shifting climate. On Canada’s famously vast ocean coastlines, storm surges and sea levels are impacting communities through both shoreline erosion and direct property damage.

As weather becomes more erratic, property owners may bear the most risk but every stakeholder in the housing supply chain—from realtors to insurers to municipalities—will feel the impact. They also have the capacity to reduce that risk.

Whether you’ve invested in commercial real estate or are considering the purchase of a property for personal use, a growing number of investors are considering climate risks before they buy.

Location Stigma

Following catastrophic weather events, location stigma has meant that property values may plummet and dampen value in local markets. In 2014, one year after the Bow River flood in 2013, Calgary’s housing market was still working to recover. Some of the affected houses had price drops from 10% to 25% with an average loss of $208,870 in assessed value for each home damaged.

A recent Harvard University report coined the term “climate gentrification” to describe how wealthier investors in coastal, flood and wildfire zones are fleeing and pushing prices up in climate resilient neighbourhoods that were once less desirable. The climate crisis also means those with fewer means are stuck with stranded assets and homes in flood and wildfire zones.

The Urban Land Institute examined real estate asset exposure to climate risk and concluded that markets such as New York and San Francisco (like Toronto and Vancouver) face intense climate risk because of the high concentration of high-value assets. When these locations are hit with catastrophic events such as flooding, the marketplace experiences a sizeable value loss, significant disruption to economic productivity and large-scale insurance payouts.

Insurability will be the first indicator of a marketplace disruption—insured and uninsured losses are already impacting the personal wealth of Canadian families and market players. According to Catastrophe Indices and Quantification Inc., insured damage for severe weather events across the country reached $1.9 billion last year.

Beyond increased insurance costs, property value impacts from climate risk can also mean a loss in value, loss of use and rent, increased costs for maintenance and repair, increases in property taxes related to municipal resilience and recovery investments as well as increased costs for higher risk mortgages. Overall, real estate with a higher climate risk will have a higher TMI (Taxes, Maintenance and Insurance) cost than a low risk property.

One of the big problems for the real estate market is that climate risk isn’t currently integrated into asset valuation. As a result, two homes might appear to have similar value, however, the risk of value loss and loss of use together isn’t often factored in.


It’s time for a real estate climate risk index

What’s the solution? Calgary, Alberta happens to offer an example of emergent best practice in disclosure. Approximately 20% of Calgary’s housing market has been affected by fluvial flood risk (river rise), so the local real estate board and the municipality collaborated to create a listing and selling resource that includes flood mapping along with walkability and transit scores. This kind of disclosure de-risks the seller and realtor from misrepresentation and offers a pricing of risk at the time of purchase.

In addition to flood maps, another important step forward is the creation of a Real Estate Climate Risk Index (REC Index), a disclosure and resilience tool for protecting home ownership in North America. The REC Index could offer a Walk-Score style rating for the cost of living or the total cost of ownership including the (de)valuation associated with climate risk and resilience at the property level and regionally.

California has legislated hazard disclosure, North Carolina has released flood mapping publicly, but as of yet, the real estate and insurance industry have not taken an index like this on.

A REC Index would be a smart approach to an emergent market risk, and investors and politicians would benefit from getting behind the idea if they want to get ahead of the coming financial storms triggered by the climate crisis.

While building infrastructure improvements can buffer against climate risks, retrofits can reduce risk exposure and create investor value. This has been true in Calgary where the real estate community and the municipality worked in tandem to protect the property value of homes and buildings through disclosure and resilience measures.

Municipalities that invest efficiently in protecting property will have a more productive economy (with less down time post extreme weather events) and a more resilient future. As well, the Intergovernmental Panel on Climate Change (IPCC)’s latest report, published last month, concluded that land use planning will need to adapt to changing climate risk, including “management of urban expansion, as well as urban green infrastructure that can reduce climate risks in cities.” IPCC’s work offers lessons for local governments and real estate investors to consider how buildings will perform in the hotter, wetter, wilder future.

Properties in municipalities that make effective infrastructure investments in resilience will be, as the Harvard researchers pointed out, in greater demand by future investors.

On the other hand, some sites will be so devalued that individual and institutional property owners will experience significant losses as will lenders and insurers. This spring’s flooding in Quebec is a prime example. Affected residents were displaced, the government offered a “once only” flood assistance program, and it created incentives for home owners in high risk locations to relocate. In some cases, these residents were offered a post-flood property value for expropriation.

Quebec has also halted development projects that are deemed to be in at-risk locations. While home owners in flood zones may not be pleased about caps on payouts, these aggressive—and progressive—moves by Quebec foreshadow the kind of government response likely to come from other provinces as they face more catastrophic weather events in the decades to come.

Today’s savvy real estate investors should also consider the benefits of disclosure in both portfolio analysis and personal investing. According to Tim Nash, financial planner and founder of Good Investing, “Investors should look for REITs (real estate investment trusts or companies that own and often operate income-producing real estate) that are leading in disclosure.” Adds Nash, “Shareholders should ask REIT managers for climate risk information.”

Imagine two REIT’s with similar dividend performance, one with relatively low risk holdings, and one with relatively high risk. The potential for differentiation in price performance and future valuation is significant.

Healthy and stable real estate valuation will have to include climate risk disclosure. Discovering the climate risk of a property isn’t straightforward in most markets, but “buy high” might be a qualifier for successful real estate investment today and in the future.

For some locations, abandoning Atlantis may be the smartest financial choice.


Chris Chopik is a sought after expert in real estate, sustainability and the impact of climate change has on the way we live around the world.

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