Property investing and climate change

September 2021

It’s increasingly clear that it’s too late to avoid catastrophic climate change. The ten years remaining before humanity kicks off a dangerous chain reaction is too short for the transition needed, which requires an 8% reduction in economic output each year from now until 2030*, and further cuts thereafter.

While there remains a chance that humanity can avoid the worst, that chance is small and shrinking. I would put it at less than 5%.

So the probability of widespread social disruption, and in some cases collapse, is high and rising. Governments need to think about that, and work out how to make what’s coming as painless as possible.

People also need to think about what all this means for long term investments, or purchases intended to provide a personal safety net, such as pensions or insurance. In this post I’ll look at property.

Where should people make property investments to protect their savings and ensure the best long term returns as the world goes meteorologically haywire?

In many parts of the world buying a house, apartment, factory or office will be much riskier than now, certainly if you are seeking an appreciating asset that you want to sell later, in perhaps ten or 15 years.

That is already obvious to anyone wanting to buy a home in much of Florida, as well as many parts of Australia, the Mediterranean and southern California, where rising sea levels or devastating wildfires are making some property investments less attractive. It is not hard to predict what will happen next. More floods, landslides and wildfires will make these areas increasingly unsafe places to live, and this will be reflected in property prices.

What about elsewhere?

But what about other places, such as London, Shanghai, Mumbai, Jakarta, New York, Tokyo, Taipei, Lagos, or Dhaka?

It will be increasingly risky to buy property in these places too. By 2050, rising sea levels mean that these cities will have smaller populations than today, as will at least 560 other major low-lying cities. Around 800 million people will be displaced, most of them in the next 30 years. This means that many people who own property in these cities today will soon want to sell. (For sale: nice apartment, sea view, dampness problem).

So, even if you buy property in these places today and hope to sell in 2030 or 2035, you will be lucky to get your money back unless you buy on high ground, and in districts that are secure from social disruption. It is not that all these places will be flooded by then. It is that everyone will fully understand what’s coming, and this will be reflected in the price buyers are willing to pay. Even cities that can afford to build major flood defences will be viewed more warily.

The same is true for property that is near rivers that are prone to flooding, which is most of them, in areas at risk from mudslides, or that are in places where there is a risk of devastating wildfires – which is to say almost everywhere.

It also makes sense to be extremely cautious about long term infrastructure investments in these locations, in transportation or power networks for example, unless you can be sure they will be constructed with flooding or wildfires in mind. With declining populations in many places, earnings forecasts should assume much lower capacity utilisation than would be expected today.

Climate change will make long term property investments increasingly risky in many parts of the world. Prices will also become more volatile, and much harder to predict.

*Economic output is directly linked to energy use, which is the source of most emissions, and even in 2030 more than 70% of energy will come from CO2 emitting fossil fuels according to current forecasts. There are currently no serious plans to change this, nor mitigate more than a tiny fraction of the effects.

Image: edited from Piet van de Wiel, Pixabay