Climate change concerns and mortgage lending

Is the industry ready to face the consequences?

Climate change concerns and mortgage lending

Away from the COVID-19 pandemic, one of the most striking stories in 2021 was the extreme weather that pummelled British Columbia throughout much of the year.

Just months after areas of the province faced record temperatures and raging wildfires, others were inundated with mudslides and widespread flooding described by provincial minister of transport Rob Fleming as “the worst weather storm in a century.”

The cost of those weather events was incalculable, wreaking havoc across BC and leaving a trail of destruction – with nearly 600 people dying from the extreme summer heat and at least five casualties resulting from the winter’s torrential floods.

They also shone a light on the enormous threat posed by climate change, with the occurrence of those two events within a matter of months signalling its growing influence, according to experts.

In November, Clean Energy Canada executive director Merran Smith told the New York Times that there was “no greater evidence” of climate change than the fact that BC had experienced both uncontrollable wildfires and rampant flooding during the previous six months.

While Rachel White, a professor at the University of British Columbia, said in the same article that more research was required to determine whether the events were caused by climate change, she said there was no doubt that they were made worse by the phenomenon.

Speaking in the House of Commons near the end of November, Prime Minister Justin Trudeau said that the extreme weather was an indication that the effects of climate change had arrived “sooner than expected” and that they were “devastating.”

Read next: BoC initiative aims to ensure banks' resilience in face of climate change

Is the mortgage industry attuned to the risks posed by the worsening climate crisis? The Canadian Institute for Climate Choices, which has recently been researching the threat to real estate from climate change, found that wide changes are required in that sector – not least in the way that risks are reported and disclosed.

“What we found with our work is that across Canada, we’re still building for yesterday’s environment, and obviously that the risks around us are changing due to climate change,” Dylan Clark, a senior research associate at the Institute, told Canadian Mortgage Professional.

“It’s going to be essential that we’re building our infrastructure, homes included, for those hazards. We need better information about where those risks are, whether it’s wildfires or floods, and also some tools – whether disclosure, or the ways that governments make decisions about infrastructure investments publicly – to make sure that we’re integrating the risks into markets.”

Clark found that poor disclosure practices on climate risk are abundant in Canadian real estate, particularly among so-called Real Estate Investment Trusts (REITs) whose assets can be exposed to high levels of unreported threat from flooding.

“In terms of the impact of REITs, that was one example where it’s really challenging to figure out how much exposure companies or securities have to flooding,” he said.

Using REIT financial disclosures, Clark investigated nearly 1,500 building addresses in their portfolios and evaluated how much flood risk those companies were exposed to – finding that 17% were located in a 200-year floodplain, with “exceptionally large” amounts of risks situated in Quebec, New Brunswick and Alberta.

In the latter province, an average of 30.5% of REIT properties are located in a 200-year floodplain, compared with a provincial average for all buildings of just 10%.

Read next: Canadian banks, insurers incapable of assessing climate risk – advocacy group

The fact that climate risk reporting is not widespread in real estate could mean that buyers are blindsided by the long-term threat posed to their investment by climate change – and may present a wider issue for taxpayers more generally.

Clark and Dena Coffman, then a research assistant at the Institute, noted in a 2020 report that “What seems like a local problem is actually an economy-wide problem,” highlighting that over $17 billion was invested in homes across the country between July and September of that year.

With the majority of the related risk secured by taxpayers through the Canada Mortgage and Housing Corporation (CMHC), that meant average Canadians were on the hook for unreported risk in the event of a catastrophe, the report said.

“By securing mortgages, the Government of Canada guarantees banks that if a home is destroyed, and property insurance and owners cannot pay back the debt, taxpayers will cover the loss,” it said.

If anything good has come out of the weather events inflicted upon BC last year, it could be that more people are becoming aware of the risks and threats posed by the ever-growing climate crisis.

“It’s obviously been a really challenging year for everybody living in BC, and I think as people cope with that disaster, there is a lot of thinking about what can be done differently moving forward,” Clark said.

“Whether it’s the heatwaves or the floods or the wildfires, we’ve seen a shift in people recognizing that these risks are here, and that we need to do a better job building and designing our communities so that we can continue to be healthy and have productive economies moving forward.”

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