Climate Change Is Increasing Housing Costs

Climate Change Is Increasing Housing Costs

KAKALI DAS

Climate change is influencing where people choose to live, and it’s driving up housing costs globally. In recent years, the cost of housing—whether renting or buying—has skyrocketed in many regions.

The term “gentrification” is frequently used to describe this phenomenon.

As more people move to cities, investment companies purchase real estate, and inflation and construction costs rise, the world is facing a housing crisis.

Housing costs are skyrocketing, particularly in major cities around the world. Notably, half of the cities with the fastest-growing rents are located in the Global South, and the impacts of climate change are intensifying this trend.

In recent years, the rising frequency of natural disasters has destroyed countless homes, reducing housing availability and driving up prices. Over 1.2 billion people are highly susceptible to at least one major climate hazard, with the majority of these vulnerable areas located in Asia.

In the United States, nearly one-third of households face high risks from natural hazards, including coastal storms, rainfall-induced landslides, flooding, and heat-driven wildfires. These threats highlight the global vulnerability to climate-related disasters.

This has led to the emergence of a new phenomenon known as “Climate Gentrification”, where perceptions of ideal living locations are shifting. Areas that were once considered affordable or undesirable are now in high demand and becoming more expensive. Miami is a prime example of this trend.

“High-income individuals living in low-lying coastal areas vulnerable to flooding are now seeking higher-elevation locations, which have historically been lower-income communities. This shift in investment patterns is displacing the existing low-income residents,” explains Zac Taylor, a researcher studying the connection between climate change and housing and insurance markets.

While many people still prefer to invest in beachfront properties and neighbourhoods like Miami Beach, inland areas such as Little Haiti are experiencing faster price increases than the rest of the city. In fact, higher-elevation real estate in Miami is among the fastest-appreciating in the United States.

Climate gentrification often accelerates after disasters, as homes are destroyed and entire neighbourhoods or cities are rebuilt and significantly transformed.

In New Orleans, housing prices surged by 33% following Hurricane Katrina, while in Puerto Rico, housing costs increased by 22% after Hurricane Maria struck in 2017.

As if rising housing costs weren’t enough, another often overlooked factor is further driving up the cost of keeping a roof over our heads—insurance.

In Australia, which is often hit by wildfires and flooding, 15% of households spend over four weeks of their annual income on home insurance. In Germany, where flooding is becoming more frequent, home insurance premiums are expected to double over the next decade. Meanwhile, in the United States, the average homeowner’s insurance premium nearly tripled between 2001 and 2021.

“As housing costs, including insurance, continue to rise, households may choose to forgo maintenance and retrofitting in order to make ends meet,” says MoireBirss, from the Climate and Community Institute.

“When a major disaster strikes, those homes are not only more vulnerable to damage, but the residents may also have fewer resources to recover,” Moire said.

The exorbitant cost of insurance isn’t just a concern for homeowners. Rates for multifamily buildings, such as apartment complexes, are also increasing, and it’s safe to assume that landlords are passing most, if not all, of these costs onto tenants, resulting in higher rents.

“In some cases, this could mean an additional several thousand dollars per year. I truly see this as a widespread issue affecting working and middle-class families,” Moire added.

These escalating costs force people in high-risk areas to make a difficult decision: either gamble with minimal or no insurance, or relocate. However, moving is easier said than done when housing prices are already so high.

As a result, many people opt for the first choice—foregoing insurance coverage just as the likelihood of disaster increases. This has contributed to what experts refer to as the “Protection Gap,” the disparity between insured and uninsured losses.

In 2023, only 38% of the approximately $280 billion in damages caused by natural disasters were insured. This gap is even more pronounced in the Global South, with Asia facing an astounding 85% uninsured loss rate.

“It primarily impacts low-income communities that depend on agriculture or small-scale food production,” said Yao Lei, from the Global Asia Insurance Partnership.

For instance, coffee farmers in Indonesia or small market vendors in Bangladesh may see their incomes disrupted by floods, as these events limit their access to customers. These groups are hit hardest because they have few resources to recover from the losses,” Yao Lei explained.

Given Asia’s vulnerability to a variety of climate-related disasters, hundreds of millions of people are at risk. This situation also places the insurance industry in a difficult position.

A large portion of the planet cannot afford insurance, while inflation and supply chain disruptions are driving up the cost of rebuilding after a disaster. The result is a combination of falling revenues and rising costs, making it a poor business model.

For the past four years, U.S. homeowner insurers have paid out more in claims than they have received in premiums. In response, they have raised prices even further or, in some cases, exited regions they consider too risky to profit from. Recently, major providers pulled out of Florida and California.

However, there are ways to better protect ourselves, ideally long before disaster strikes. Making homes climate-resistant, such as with fire-resistant roofing or durable siding in hurricane- and typhoon-prone areas, can reduce risks. While this requires an upfront investment, it is ultimately more cost-effective than dealing with the aftermath of damage and can save lives.

Substantial state investment in infrastructure can make entire regions safer. For example, in the Netherlands, there is a longstanding tradition of building robust infrastructure to manage flood risks.

As a result, most residents in the low-lying areas of the Netherlands, many of which are below sea level, do not require flood insurance. This approach is not commonly seen in places like Florida, for various reasons.

From Thailand to Berlin, sponge city projects are replacing concrete and pavement with permeable surfaces like plants and moss to absorb water. The more we build resilience, the less we need to rely on the safety net of insurance.

In this approach, key activities would involve identifying areas where building new housing is too risky and restricting development, assisting people in relocating from high-risk zones, and implementing community-focused risk mitigation strategies.

At the city level, higher-elevation neighbourhoods are beginning to gentrify, while on national and regional levels, areas prone to wildfires and floods remain in demand. Many people can’t simply relocate across the country due to climate risks.

Buyback schemes and innovative insurance policies, such as gradually phasing out coverage along coastlines once properties are sold, could also be effective solutions.

All of these measures will help reduce the impact of disasters, but effective preparation requires accurate risk prediction. Insurance companies, along with newer independent firms, have developed advanced climate-based risk models to aid in this process.

Globally, we will experience not only an increase in the intensity of events but also greater variability, with potentially colder winters, hotter summers, and more extreme storm events of various kinds.

In the insurance industry, this necessitates creating plans that cover a wide range of disasters and are accessible to all, if not mandatory, much like how many countries handle health insurance.

Countries like Spain, France, and Switzerland include disaster coverage in standard, often mandatory, home insurance policies, frequently supported by the state. This approach spreads the risk across a larger population, creating a bigger pool to help keep costs down.

Rather than relying solely on private insurers, a comprehensive approach to risk would involve encouraging people to move away from disaster-prone areas, assisting them in reinforcing their homes, and keeping insurance prices affordable.

While it may seem like a daunting challenge, it is more sustainable than leaving people to face disasters alone. Ensuring affordable housing and protecting communities from climate disasters will require a fundamental shift in how we perceive and manage risk.

Without a collective approach, the costs and damage from natural disasters will continue to escalate uncontrollably.

What steps do you think we should take to ensure that both housing and insurance remain affordable in the face of climate change?

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