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Climate change risks to property values

NZ house coast image

Extreme sea-levels from storms augmented by sea-level rise are potentially a threat to New Zealand’s property values and financial stability, according to a University of Otago expert.

Professor Ivan Diaz-Rainey, of the Department of Accountancy and Finance, joined other prominent speakers at the Assembly of Investment Chairs’ seminar on Tuesday 29 November to discuss this year’s theme of ‘greenwashing, climate disclosures and impact investment’.

Ivan Diaz-Rainey profile.jpg
Professor Ivan Diaz-Rainey

He took the opportunity to share the insights he has found 18 months into his three-year long Royal Society-funded Marsden project that partners with GNS Science, Bodeker Scientific, National Institute of Water and Atmospheric Research (NIWA) and the Reserve Bank of New Zealand.

“Our interdisciplinary team has signed a partnership agreement with NIWA, on using extreme sea level data to explore the risk this could have on residential properties across New Zealand,” Professor Diaz-Rainey says.

“We overlayed this with CoreLogic’s real estate data to see the average reoccurrence interval a certain area would experience flooding.

“This identified several areas where property would be repeatedly flooded and vulnerable to extreme sea levels, particularly in the Hawkes Bay area but also in locations like the West Coast, Bay of Plenty and Nelson.

“In certain scenarios, up to 2 per cent of the value of domestic real estate is exposed to extreme sea levels every two years, assuming that the water rises and displaces in a ‘flat’ way, like a bathtub, but other hazards like runoff, precipitation and groundwater could conflate the damage done to properties and the loss to banks that have real estate mortgages in those areas.”

Professor Diaz-Rainey says predicting flooding risk can be challenging due to things like having to make assumptions about flood impact thresholds, different land elevation models, data error and groundwater variation. He noted that “there is devil in the detail and our research is showing that devil can make a big difference”.

His team plans to continue their work in this area to identify the differences between banks to see how these risks might affect bank capital.

“We now know what we need to do to determine risk but, at the moment, we don’t have the data, models and certainty about the future to determine things concretely,” he says.

“I think a major missing item we need to better understand these risks is how these hazards interact and, as banks and firms look to manage this risk, I would encourage them not to consider it a reporting exercise but to instead think of it as continual process of increasing competency because we need to be realistic about data limits and do our best to operate around this.”

Professor Diaz-Rainey joined the University of Otago in 2012 and is the Director and founder of the Climate and Energy Finance Group (CEFGroup), one of the largest climate and green finance academic research teams in the world.