There’s plenty of factors to consider when investing in a home. Proximity to schools, shops, health services, family and public transport are some of the key considerations. Smart investors of today are factoring in another consideration – climate change risk – and for good reason.
Climate change risk is impacting the valuation and insurance cost of Australian residential properties and is expected to become more important as time marches on, and the impacts of climate change become more visible. For this reason it make sense to obtain a climate risk report at the same time as you conduct your building and pest inspections.
But those of you who aren’t familiar with climate projection data, where do you get such information?
Today’s guest is Karl Mallen, CEO of Climate Valuations, the first company to provide professional, investment-grade physical climate risk analysis to individual property owners at a global scale. Karl has worked on climate change impacts for over 20 years and is a prominent advocate for the rights of vulnerable groups to have access to relevant information about climate change risk.
In this episode, Karl Mallon from Climate Valuation shares how you can assess the climate risk to your home and steps you can take to ensure that your investment is physically and financially sound.
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Self Sufficiency in the Suburbs
Could You Share Your Background and how and why you chose to work in the climate risk space?
I originally did a degree in physics in the UK, and I decided that even though I was very drawn to theoretical physics, I actually decided that there were lots of challenges in the world. I’ve also been very engaged with environmental issues as a young age. And so I thought I would try training that would help me to participate in solutions. So I switched to studying engineering in Australia, did a PhD at a young age, and I started just study renewable energy. Then I finished a PhD in wind energy and started doing working in that space. I had a view that that we couldn’t solve these things technically if we didn’t have a demand for renewable energy and clean energy.
So I started to look at what NGOs were doing and then accepted a job internationally with a big NGO and worked on energy policy with them. That led me into climate policy. I started doing emissions modelling and, and getting into some way the politics of helping, NGOs convey to the public what different policies meant, whether it was a solar program or a carbon tax, and turning that into numbers, because I’ve always believed that if you turn things into the numbers, people understand and then they can make informed decisions. The final piece of the puzzle was it really started to occur to me that we couldn’t really decide on whether we were prepared as a society to bear the cost of the transition to clean energy if we didn’t understand what the cost of not doing anything was.
The ability to turn climate change impacts into costs that were meaningful to decision makers from someone in government through to mum and dads making decisions about their finances, was very challenging. I jumped headlong into that challenge to try to build the pieces of all the solutions to that particular problem. It took a while, but we got there in the end and now I’m glad to say we just won an Australian technology competition yesterday, so maybe we can say that we’ve got there. There’s always more to do.
How is climate change impacting the valuation of residential homes and home insurance in Australia?
So taking a step back, the reason we did it was because we realised the complexity of doing this sort of analysis was only really accessible to government and the private sector. So big companies, state government, to some extent local councils and that they were making, they were aware of lots of information, making decisions, in their own interests, without people, that their decisions affected understanding or having access. So we did a lot of work to try and get something that would make that available. And now it’s a company policy. We won’t produce information for one group if we don’t find a way to make it generally available to others. When we develop systems for climate evaluation at the property level, the good news was definitely that nine out of 10 properties are not really exposed to something that would cause significant harm.
So they’re not exposed to the flooding. They’re not in a flood zone. They’re not low lying and therefore affected by sea level rise. They’re not in the Bush and vulnerable to forest fires.
The kind of things that you get left with might be things like a windstorm, hail, subsidence, where if we have clay soils you can get movement. It’s not catastrophic. You’re not going to lose your home but you might have $10,000 or $20,000 worth of repairs. But it’s not going to be financially or physically catastrophic. Now that’s kind of the good news, which is nine out of 10 properties are going to be okay because even if climate change makes those other things worse, it won’t cause severe financial hardship. We wouldn’t expect insurance to become unavailable.
About 5% of properties are what we would think of as significant risk. And that means we think they are either already at, or very close to, a point where insurance may become unavailable or affordable. And there’s sort of circumstantial evidence to support that. If you look at flood cover in Australia, it covers, between 90 or 96% of properties. The reason those other 4% aren’t covered isn’t disclosed. It could be random, but my bet, it isn’t . My bet is because it’s unaffordable. People who need that cover most are the ones that don’t have it. And we hear that obviously, anecdotally, every time there’s an event. We hear about people who homes are severely damaged and they’re on the front of the paper, with their kids, and they don’t have insurance.
That’s a very, very unfortunate position for those people to be in.
And there’s about another 5% where they’re not there now, their insurance premiums are increasing, but over the course of the coming decades, climate change will essentially push those over the line into a situation where they’re going to be in that unaffordable position or their insurance will. So that’s what the complexion looks like for homeowners . The good news is that nine out of 10 people are going to come away, having done a check and realised “Wow, that’s great! I can relax.” So when I sell my home, I can make a big deal out of it.
But especially that highest 5% are the ones that we really need to get in and help.
How is climate change impacting vulnerable groups in Australia and why do we need to be more mindful of this in our policy making and information sharing to create a more equitable society?
Right! So what we’re in the process of is an unfolding of a series of pieces that will be quite detrimental to the high-risk group. So we’ve got a large number of homes.. let’s round it up to half a million homes.. which are in flood zones , coastal inundation areas or even those in bushfire areas. We’ve got a relatively high risk pocket mainly affected by different types. Now, the last group in there is those homes that may be affected by cyclones coming south or worsening. Now, we know that the insurers are looking at this very seriously. We can split the insurers into three groups.
One of them is doing very high quality risk analysis and is really trying to understand these risks and price them very carefully.
Someone like Insurance Australia group has teams of scientists trying to understand flooding, cycling and so forth. They’re going to do very, very specific pricing. They’ll always provide a policy, but that policy may cost over $10,000 a year, and that will be the right cost for that policy.
There are other groups who have more limited information. They don’t have those resources. We call these red line insurers. They’ll say “Nope, we’re not going to provide insurance in this particular area.” You can see this if you go to an area in Far North Queensland, and you start trying to get a policy online. You’ll very quickly see the red line ones because they won’t offer a policy. They just go “No, we don’t want to be inside cyclone areas. We don’t want to be in flood areas.”
So what that means is that insurance is going to become very expensive or hard to get if you’re in these high risk areas. What that then means is that you’re supposed to have insurance for your mortgage, because in actual fact the bank owns the property and you’re supposed to keep it insured. So once you don’t have insurance, you’re kind of in breach. Now at the moment, people are operating in a grey area, which is “I’ve got insurance for home buyer or burglary or whatever.” But you may well have ticked the box to say, “I don’t need flood cover because it’s going to be an extra $10,000.”
Mortgage lenders are going to start cracking down on that. Why are they going to crack on it? Because we’re telling them to. We’re saying “You are in breach of your own internal fiduciary responsibility for shareholders and so forth. And you’re not doing these people a favour by turning a blind eye to them.” You know, if each insurance policy costs $10,000 it’s better to pay that and have the house ruined. So that’s going to come to a head where we’ll start to see mortgage lenders no longer offering that cover, and no longer offering mortgages to homes that can’t get insurance. So we’re really going to start to see some suburbs come to light where people won’t be able to sell the properties reasonably soon.
What are the most high risk locations to live in Australia from a climate risk perspective? What areas of Australia will become uninsurable for residential properties in future?
One of the things we’ve done is we’ve put out a national report. It’s on the xdi.systems website. Anyone can download the report and see that it literally lists the suburbs and the relative risk levels. We’re putting out an updated report quite soon, we’re just putting the finishing touches to that. So we’re very open about where these areas are. I mean, every State’s got them.
So, doing a little run around the country. You’re in Adelaide. So, let’s start there. Some of the low lying suburbs like Westlake’s would be of a concern.
If we go into WA, Mandurah. Some of the suburbs south of Perth are already having problems. It’s not a secret that they’ve got big erosion problems. Some of them are low lying and subject to coastal inundation. Like parts of Darwin. Oddly enough, the bit that we’re concerned about in Queensland is the bit just below the current cycling threshold, because if the cyclones move south, the buildings aren’t designed for it. We saw that in Kalbarri in WA. There was a big cyclone that caused huge amounts of damage because it went into the next building zone down and the buildings just weren’t designed for it. If we see that in Queensland that’s going to cause a lot of problems. We’ve got places like Sunshine Coast, Gold Coast, with lots of low lying areas and housing developments.
As we get into New South Wales, obviously any of the flood zones in the Northern rivers, but also the coastal areas like the Hunter, Lake Macquarie, Central Coast are all places where we would have concerns. These are areas where we think large communities will be at risk unless there’s changes to planning codes and eventually protective measures put in place.
That’s a little tour around! So I’ve left off Tasmania but Tasmania is interesting because you have a situation where not long ago we had very severe droughts there. And also we saw fires going through forests that haven’t burnt since the Ice Age. So things are changing in Tasmania quite significantly.
Even some parts of inner-city Melbourne have issues with flooding. We have been doing some work, with the government there to help them identify, high-risk social housing. I’m really pleased to say, and I think it’s world-leading stuff, that the Victorian government has embarked on a process to make sure that all social housing is low risk. Obviously that’s a multi-year program of divestment, acquisition, adaptation, and so forth. But, you know, I think that’s really, forward-looking not just because they’re their assets and they own them and they know they should be protecting their investments, but also because you don’t want high vulnerability people put in high vulnerability properties. And so I think that’s a really progressive approach. So it’s a nice combination of bringing science, technology and human centric policy altogether. Some really progressive stuff being done.
What datasets and tools exist that evaluate the impact of climate change risk on residential properties, and how can regular Australians access these data?
Let me outline what’s there and some tricks and tips and I can obviously spruik what we do, but it might help people understand what we do and why we decided to do that. If someone comes along to me and says, “Hey, I’m a home buyer. What should I look out for?” We’re getting a lot of millennials who are very switched on to climate change and who are at an age where they’re looking to buy a home. They are really asking these sorts of questions. So we’ve got a few tricks and we strongly urge people to use them.
The first one is an insurance hack, which is basically you go to the home that you’re thinking of and you try and get insurance policy quotes online, which are all automated from at least five or six insurance providers.
It doesn’t take long. You can put the same information in each one, like the value, the same specification. It doesn’t even have to be right. Just make them all the same and then see what you get. What you looking for is if you get five policies and they’re all kind of the same within 20%, then the only variations that you’re getting is this one’s got a bigger access or this one’s got some different exclusions. The warning signs to look for is, are any of the insurers refusing to provide a policy? So they say, “oh, sorry, we don’t buy policies in this area.” Big red flag. Another one is if you see one insurer providing a policy (there’s always some insurers which will always provide a number) and then the other insurers are half the value. Like a big difference in price. That’s telling you one insurer knows something that the other insurers don’t.
And of course, you’ll go, “oh, those guys they’re just trying to gouge me, blah, blah, blah. I’ll go the cheap one.” The difference is that the cheap one might not be available for very long. So maybe you’ll get it for one or two years, but if you’re getting a mortgage for 30 years, the one that’s most expensive is probably the one that’s intending to be around for a while. And you’ll probably find that more and more of those insurers that you were insured with are going to leave. I am hearing stories already about people who’ve had literally a cheque sent back to them, their money returned and the policy cancelled.
Where can we go to find more about climate valuation and get a climate risk assessment on our property of interest?
Well there you have it! I hope you found this episode useful.
For further information on Climate Valuation visit their website www.climatevaluation.com
If you’re ready to reduce your emissions, your household waste, live toxin-free and embrace a more sustainable lifestyle with the support of Laura, join the Self Sufficiency in the Suburbs community today!
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