Climate change could hurt banks' mortgage books

  • By Zilla Efrat

Around 3.5 per cent of dwellings in Australia could be considered to have a “high risk" of experiencing price falls in the wake of rising climate change, according to an analysis from the Reserve Bank of Australia (RBA).

Published in the RBA’s September Bulletin on Thursday, a study by RBA economists warn that climate change could have a big impact on Australian banks' mortgage books, especially those banks with greater exposure to certain New South Wales and Queensland regions.

Mortgages account for around two-thirds of Australian major banks' portfolios.

The main risk indicator used in the analysis was Value at Risk (VaR). The VaR is measured by the “technical insurance premium”, which captures the annual expected cost of climate-related damage relative to the replacement cost of dwellings. As a result, the VaR captures the costs like insurance, repairs, replacement and maintenance costs.

The researchers note that if many insurers increase annual premiums or withdraw their coverage of certain climate-sensitive regions, this may leave households without insurance cover and banks susceptible to borrower defaults. Evidence of this has already started to emerge in northern Australia, where high, unaffordable premiums are leading to a rise in uninsured homes.

The good news is that the study suggests that by 2050, only around 1.5 per cent of properties in Australia are projected to experience a rise in annual insurance premiums that could reduce housing values by around 10 per cent or more.

However, some properties could see very large price falls. “These risks could emerge more rapidly if buyers start to recognise the increasing risk of climate change and factor this in to current property prices (by discounting prices more heavily than the actuarial fair amount) ahead of climate change impacts being fully realised,” the researchers report.

According to the study, the risks also appear to be concentrated in small geographical areas. The highest risk regions are mostly located on the coastline, particularly in Brisbane.

It finds that climate change could result in around 400,000 more Australian home loans – 2.5 per cent of all loans – having a loan-to-value ratio (LVR) of more than 80 per cent by 2050. And, around half of these loans could move to an LVR greater than 90 per cent.