Sea level rise and coastal property values

2009-03-11

in Economics, Science, The environment

Anticipating a future featuring significant amounts of sea level rise, Joseph Romm has been pondering when this will affect the prices of coastal properties. The fact that the market probably hasn’t already taken into account the conservative sea level rise estimates of the IPCC is just one demonstration of how prices do not reflect ‘perfect information’ in the way often assumed by economists.

My guess is that higher insurance premiums will be the mechanism through which the threats to coasts in the developed world will be brought to light, for most people. Since insurance companies need to gauge risk adequately in order to stay in business, they have fewer conflicts of interest when it comes to evaluating climatic science and making projections about what the consequences of our greenhouse gas emissions will be.

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{ 9 comments… read them below or add one }

R.K. March 11, 2009 at 7:46 pm

Is this the next housing bubble?

Depending on the amount of sea level rise, this might affect whole cities.

Milan March 11, 2009 at 7:55 pm
oleh March 12, 2009 at 1:28 am

I have not studied this issue specifically. However, I have some understanding on how the insurance industry works and premiums are determined.

I do expect there will be some increase in premiums. However, I am afraid that it will be too little, too late to change human behaviour sufficiently.

Unfortunately, there are at least four factors which would prevent a rise in insurance premiums to reflect the increased particular risk to coastal areas

1. by the time insurance premiums rise will be too late. Insurance policies and premiums are determined only one year in the future. That is the insurance markets will set premiums based on the risk they face only in the next twelve months.

By the time the insurance industry reacts to the increased risk in a substantive way to effect behaviour, the climatic conditions are likely to have reached beyond the tipping point.

2. Also the insurers are in a competitive industry and policy holders will be drawn to the insurers with lower premiums which may not reflect the risk.

3. the increased risk in the coastal areas does not come from increased “risky” behaviour in the coastal areas but rather by increased global carbon emissions. In effect the coastal area policy holder has little effect on the risk and therefore little incentive to change behaviour to reduce the risk. The same applies to policy holders outside of the coastal area.

4. the industry involves the globalization of risk in particular through re-insurance. Therefore increased risk are subsidized by stable or even decreased risks. Therefore the increased risks in the coastal areas are likely to be spread out through the entire insurance industry such that the premiums for all insurance will rise to subsidize the risk. This will not change behaviour.

This is different from the housing bubble which arose when the financing industry ignored the risks arising from poor lending practices and individuals took on more risk than they could bear and the financial institutions saw their equity crumble beyond the value of the loan.

Therefore there needs to be other forces to change behaviour. Sorry to be pessimistic because I am by nature an optimist.

As it is approaching bed-time for me, an easy solution does not come to me. Although I suspect there is no easy solution.

Magictofu March 12, 2009 at 9:18 am

I have heard or a group of cottage owners on a small beach in Quebec that were not able to contract new insurances after some of the cottages closest to the coast were destroyed by a strom surge and that a study suggested that all the others would eventually be destroyed as well given expected sea level rise. I did not find a reference to this online but I am pretty sure I did not dream this.

Milan March 13, 2009 at 10:50 am

I am surprised that insurers have such a short-sighted approach, when it comes to setting rates.

Given that year-on-year climate change will be getting bigger during the near to medium future, they will probably eventually be forced to change their approach.

oleh March 21, 2009 at 6:04 am

Insurance is a commodity product that is sold in one year lots. I do not see the change coming in length of the policy but rather in what is included or excluded.

Insurers may in time, and probably to some degree already have, refuse to cover for weather related water loss on property damage by excluding for such coverage.

There is already the extensive practice of exclusion for pollution coverage. In the 1980’s and 1990’s the industry as a bloc simply stopped providing their insured with coverage for damage from pollution. Exclusion from pollution is now standard.

. April 27, 2010 at 11:13 am

“Living near the ocean has always come with the risk of getting wet. Yet coastal dwellers whose homes got swamped by the occasional storm surge could rely on the water to recede eventually. That certainty is gone. Titus has calculated that a three-foot rise in sea level will push back East Coast shorelines an average of 300 to 600 feet in the next 90 years, threatening to submerge densely developed areas inhabited by some 3 million people, including large parts of New York City, Philadelphia, and Washington, D.C. As Margaret Davidson, director of the National Oceanic and Atmospheric Administration’s Coastal Services Center in Charleston, South Carolina, puts it, “Today’s flood is tomorrow’s high tide.”

The rising waters can be kept at bay by constructing dikes and bulkheads, pumping sand to fill out receding beaches, and elevating existing buildings and roads on embankments or pylons. But such efforts may prove prohibitively expensive—Titus says that in the lower 48 states alone, they could cost as much as $1 trillion over the next century, and he estimates that in the process, 60 to 90 percent of the East Coast’s wetlands could be destroyed as bulkheads and other defensive measures restrict the movement of estuaries and marshes, drowning them when the ocean rises.”

Peer reviewed science August 6, 2015 at 7:07 pm

Profiling risk and sustainability in coastal deltas of the world

Deltas are highly sensitive to increasing risks arising from local human activities, land subsidence, regional water management, global sea-level rise, and climate extremes. We quantified changing flood risk due to extreme events using an integrated set of global environmental, geophysical, and social indicators. Although risks are distributed across all levels of economic development, wealthy countries effectively limit their present-day threat by gross domestic product–enabled infrastructure and coastal defense investments. In an energy-constrained future, such protections will probably prove to be unsustainable, raising relative risks by four to eight times in the Mississippi and Rhine deltas and by one-and-a-half to four times in the Chao Phraya and Yangtze deltas. The current emphasis on short-term solutions for the world’s deltas will greatly constrain options for designing sustainable solutions in the long term.

Sea defences not enough to protect delta cities from rising flood risk – study

. July 27, 2017 at 9:48 pm

Severe, chronic flooding will devastate California coast as sea levels rise, experts say

If the sea rises by six feet by the end of the century, more than 600 communities would experience chronic inundation, including more than 50 urban centers from Oakland to Miami to boroughs of New York City, according to the new study.

Under this scenario, damages could significantly start to really rack up. The real estate service Zillow predicts that if tides rise by six feet, nearly 300 cities in the nation would lose at least half of their housing stock.

It also estimates that in such a situation, about 1.9 million homes could be destroyed, with combined loses of roughly $882 billion. Florida stands to lose the most with nearly 1 million homes wiped out. California, New York and Massachusetts also stand to suffer major financial harm from the loss of expensive properties.

But is six feet of sea-level rise likely?

In the past century, the sea level rose roughly seven inches on average. Because of tides and weather patterns, the levels are not constant throughout the planet.

Scientists believe the oceans will likely continue to rise at least by that much through 2100, but could increase by as much as eight feet on average globally.

Still, while scientists have upped their predictions for potential sea-level rise in recent years, conservative estimates fall far short of the six-foot mark.

A report in April from professors at UC San Diego’s Scripps Institution of Oceanography and UC Santa Cruz found that after midcentury, sea-level rise is increasingly dependent on efforts to curb greenhouse gases.

If the fight against climate change proves extremely successful, there’s a nearly 67% chance that sea-level rise could be contained to between one and 2.4 feet through 2100, according to that April analysis. If mitigation efforts fall apart, the report said, the world would most likely see increases of 1.6 to 3.4 feet.

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